|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
|                                  
|FORM 10-K                         

|                                                       |                                                                                         
|------------------------------------------------------ | ----------------------------------------------------------------------------------------
|(Mark One)                                            
|                                                       |                                                                                         
|x                                                      | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                       |                                                                                         
|                                                       | For the fiscal year ended December 31, 2010.                                            
|                                                       |                                                                                         
|o                                                      | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                       |                                                                                         
|                                                       | For the transition period from _______ to _______.                                      
|                                                      
|Commission file number: 1-15087                       
|                                                      
|I.D. SYSTEMS, INC.                                    
|(Exact name of registrant as specified in its charter)

|                                                                 |                                       
|---------------------------------------------------------------- | --------------------------------------
|Delaware                                                         | 22-3270799                            
|(State or other jurisdiction of                                  | (IRS Employer                         
|incorporation or organization)                                   | Identification No.)                   
|                                                                 |                                       
|123 Tice Boulevard, Woodcliff Lake, New Jersey                   | 07677                                 
|(Address of principal executive offices)                         | (Zip Code)                            
|                                                                 |                                       
|                                                                
|(201) 996-9000                                                  
|(Registrants telephone number, including area code)            
|                                                                
|Securities registered pursuant to Section 12(b) of the Act:     
|                                                                 |                                       
|Common Stock, par value $0.01 per share                          | The NASDAQ Global Market              
|(Title of class)                                                 | (Name of exchange on which registered)
|                                                                 |                                       
|Securities registered pursuant to Section 12(g) of the Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.

|                                                                      |                            
|--------------------------------------------------------------------- | ---------------------------
|Large accelerated filer o                                             | Accelerated filer o        
|                                                                      |                            
|Non-accelerated filer x
(Do not check if a smaller reporting company) | Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x

The aggregate market value of the registrants common stock, par value $0.01 per share (Common Stock),
held by non-affiliates, computed by reference to the closing price of the
Common Stock as of June 30, 2010, the last business day of the registrants
most recently completed second fiscal quarter, was approximately $25.8 million.

The number of shares of the registrants
Common Stock outstanding as of March 28, 2010, was 11,171,000 shares.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                         |  |                  
|---------------------------------------------------------------------------------------- |  | -----------------
|Document                                                                                 |  | Part of Form 10-K
|                                                                                         |  |                  
|                                                                                        
|Portions of the Proxy Statement For the Registrants 2010 Annual Meeting of Stockholders |  | Part III         

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I.D. SYSTEMS, INC.

TABLE OF CONTENTS

|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|         |  |                                                                                                              |  |     
|         |  | PART I.                                                                                                      |  |     
|Item
1.  |  | Business                                                                                                     |  | 2   
|Item
1A. |  | Risk Factors                                                                                                 |  | 16  
|Item
1B. |  | Unresolved Staff Comments                                                                                    |  | 27  
|Item
2.  |  | Properties                                                                                                   |  | 27  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 27  
|Item
4.  |  | (Removed and Reserved)                                                                                       |  | 27  
|         |  |                                                                                                              |  |     
|         |  | PART II.                                                                                                     |  |     
|Item
5.  |  | Market for Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 28  
|Item
6.  |  | Selected Financial Data                                                                                      |  | 31  
|Item
7.  |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations                        |  | 32  
|Item
7A. |  | Quantitative and Qualitative Disclosures
About Market Risk                                                   |  | 44  
|Item
8.  |  | Financial Statement and Supplementary Data                                                                   |  | 45  
|Item
9.  |  | Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure                         |  | 80  
|Item
9A. |  | Controls and Procedures                                                                                      |  | 80  
|Item
9B. |  | Other Information                                                                                            |  | 80  
|         |  |                                                                                                              |  |     
|         |  | PART III.                                                                                                    |  |     
|Item
10. |  | Directors, Executive Officers and Corporate
Governance                                                       |  | 81  
|Item
11. |  | Executive Compensation                                                                                       |  | 81  
|Item
12. |  | Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters               |  | 81  
|Item
13. |  | Certain Relationships and Related
Transactions, and Director Independence                                    |  | 82  
|Item
14. |  | Principal Accounting Fees and Services                                                                       |  | 82  
|         |  |                                                                                                              |  |     
|         |  | PART IV.                                                                                                     |  |     
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 83  

i

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PART I.

Cautionary Note
Regarding Forward-Looking Statements

In addition to
historical information, this Annual Report on Form 10-K of I.D. Systems, Inc.
contains forward-looking statements (within the meaning of Section 27A of the
Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act)), which
may include information concerning our beliefs, plans, objectives, goals,
expectations, strategies, anticipations, assumptions, estimates, intentions,
future events, future revenues or performance, capital expenditures and other
information that is not historical information. Forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may be
beyond our control, and which may cause our actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Many of
these statements appear, in particular, under the headings Business,
Selected Financial Data and Managements Discussion and Analysis of
Financial Condition and Results of Operations in this Annual Report on Form
10-K. When used in this report, the words seek, estimate, expect,
anticipate, project, plan, contemplate, plan, continue, intend,
believe and variations of such words or similar expressions are intended to
identify forward-looking statements. All forward-looking statements are based
upon our current expectations and various assumptions. We believe there is a
reasonable basis for our expectations and beliefs, but there can be no
assurance that we will realize our expectations or that our beliefs will prove
to be correct.

There are a
number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this report.
Important factors that could cause our actual results to differ materially from
those expressed as forward-looking statements herein include, but are not
limited, to:

| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | future
 economic and business conditions;                                                                                         
| |  | the loss of
 any of our key customers or reduction in the purchase of our products by any
 such customers;                        
| |  | the failure
 of the market for our products to continue to develop;                                                               
| |  | our inability to protect our intellectual
 property;                                                                              
| |  | the
 possibility that we may not be able to integrate successfully the business,
 operations and employees of acquired businesses;
| |  | the effects of competition from a wide
 variety of local, regional, national and other providers of wireless
 solutions;          
| |  | changes in
 laws and regulations or changes in accounting policies, rules and practices;                                          
| |  | changes in
 technology or products, which may be more difficult or costly, or less
 effective, than anticipated; and              
| |  | those risks
 and uncertainties set forth under the heading Risk Factors in Item 1A of
 this report.                             

There may be
other factors of which we are currently unaware or deem immaterial that may
cause our actual results to differ materially from the forward-looking
statements. All forward-looking statements attributable to us or persons acting
on our behalf apply only as of the date they are made and are expressly
qualified in their entirety by the cautionary statements included in this report.
Except as may be required by law, we undertake no obligation to publicly update
or revise any forward-looking statement to reflect events or circumstances
occurring after the date they were made or to reflect the occurrence of
unanticipated events.

Note Regarding
Trademarks

I.D. Systems
has, or has applied for, trademark protection for I.D. Systems, Inc.®, Vehicle
Asset Communicator®, ChaMP®, Wireless
Asset Net®, AvRamp®, Opti-Kan®, WiFree®, Intelli-Listening®,
SecureStream®,
PowerFleet®, INTELLIPOINT®, PowerKey®, SafeNav, and VeriWiseTM.

Item 1. Business

Overview

I.D. Systems,
Inc. (together with its subsidiaries, I.D. Systems, the Company, we,
our or us) develops, markets and sells wireless solutions
for managing and securing high-value enterprise assets. These assets include
industrial vehicles, such as forklifts, airport ground support equipment, rental
vehicles, and transportation assets, such as dry van trailers, refrigerated
trailers, railcars and containers. Our patented systems utilize radio frequency
identification (RFID), Wi-Fi, satellite or cellular
communications, and sensor technology to address the needs of organizations to
control, track, monitor and analyze their assets. Our solutions enable
customers to achieve tangible economic benefits by making timely, informed
decisions that increase the security, productivity and efficiency of their
operations.

We have
focused our business activities on three primary applications: (i) industrial
fleet management, (ii) transportation asset management, and (iii) rental fleet
management. Our solution for industrial fleet management allows our customers
to reduce operating costs and capital expenditures and to comply with certain
safety regulations by accurately and reliably measuring and controlling fleet
activity. This solution also enhances security at industrial facilities and
areas of critical infrastructure, such as airports, by controlling access to,
and restricting the use of, vehicles and equipment. Our solution for
transportation asset management allows our customers to increase revenue per
asset deployed, reduce fleet size, and improve the monitoring and control of
sensitive cargo. Our solution for rental fleet management assists rental car
companies in generating higher revenue by more accurately tracking vehicle
data, such as fuel consumption and odometer readings, and improving customer
service by expediting the rental and return processes. In addition, our
wireless solution for carsharing enables rental car companies to establish a
network of vehicles positioned strategically around cities, control vehicles
remotely, manage member reservations by phone or Internet, and charge members
for vehicle use by the hour.

2

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In addition to
focusing on these core applications, we adapt our systems to meet our
customers broader asset management needs and seek opportunities to expand
our solution offerings through strategic acquisitions. In 2009, for example,
we acquired Didbox Ltd., a privately held, United Kingdom-based manufacturer
and marketer of vehicle operator identification systems, which provides us with
a wider range of industrial vehicle management solutions and expands our base
of operations in Europe. On January 7, 2010, we acquired the Asset Intelligence
business unit of the General Electric Company, which provides trailer, railcar,
and container tracking solutions for manufacturers, retailers, shippers and
freight transportation providers, through the acquisition of Asset Intelligence,
LLC (Asset Intelligence or AI), which became our wholly
owned subsidiary following the acquisition. We believe that the Asset Intelligence
business complements the Companys existing businesses, as the focus of
Asset Intelligence on trucking, rail, and intermodal applications significantly
expands the scope of assets addressed by the Companys product solutions.
The web and mobile communications technologies of Asset Intelligence also
complement I.D. Systems portfolio of wireless asset management patents.
In addition, the acquisition has provided the Company with access to a
broader base of customers.

Prior to the
AI acquisition, the Company operated in a single reportable segment, which
consisted of the historical operations of I.D. Systems, Inc. (IDS).
Subsequent thereto, the Company has determined that it has two reportable
segments organized by product line: IDS and AI. The IDS operating segment
includes the Companys core wireless asset management systems operations: I.D.
Systems, Inc., I.D. Systems GmbH, and Didbox Ltd. This core business develops,
markets and sells solutions for industrial fleet management and rental fleet
management. The AI operating segment, which consists of Asset Intelligence,
LLC, provides data-driven telematics solutions for transportation asset
management such as trailers and containers.

We sell our
solutions to both executive and division-level management. Typically, our
initial system deployment serves as a basis for potential expansion across the
customers organization. We work closely with customers to help maximize the
utilization and benefits of our system and demonstrate the value of
enterprise-wide deployments. Post-implementation, we consult with our customers
to further extend and customize the benefits to the enterprise by delivering
enhanced analytics capabilities.

We market and
sell our solutions to a wide range of customers in the commercial and
government sectors. Our customers operate in diverse markets, such as
automotive manufacturing, heavy industry, retail and wholesale distribution,
transportation, aviation, aerospace and defense, homeland security and vehicle
    rental. Based on revenues for 2010, our top customers were Wal-Mart Stores,
    Inc., Ford Motor Company, GE Trailer Fleet Services, and the Raymond Corporation.

IDS was
incorporated in the State of Delaware in 1993.

3

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Our Solutions

We design and
implement asset management solutions that deliver an enterprise-level return on
investment for our customers. Our solutions can be categorized as either
closed-loop systems for managing campus-based assets, or mobile systems for
managing remote, over-the-road assets.

Campus-Based Asset Management Solutions

Our
campus-based asset management solutions incorporate short range wireless
devices that provide on-board control, location tracking and data processing
for enterprise assets, to provide real-time visibility of, and two-way
communications with, such assets. These systems provide architectural and
functional advantages that differentiate them from systems used for inventory
and logistics tracking. For example, while inventory tracking systems rely on
constant, continuous radio frequency, or RF, connectivity to perform core
functions, our systems require only periodic RF communications, and our
on-asset devices perform their core functions autonomously.

Our
campus-based asset management system consists of three principal elements:

| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | miniature
 wireless programmable computers attached to assets;                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                              
| |  | fixed-position
 communication infrastructure consisting of network devices with two-way RF
 capabilities, RF-based location-emitting beacons and application-specific
 network servers; and                                                                                  
| |   |                                                                                                                                                                                                                                                                              
| |  | proprietary
 software, which is a user-friendly, Windows-based and browser-based graphical
 user interface that provides visibility and control of the system database, and which is hosted either at the local installation site or at I.D. Systems commercial data center.

Each of these
system elements processes and stores information independently to create a
unique, patented system of distributed intelligence, which mitigates the risk
that a single point of failure could compromise system integrity or data and
asset security. Our on-asset hardware stores and processes information locally
so that it can autonomously and automatically control the asset and monitor
asset activity regardless of the status or availability of other system
components. Our on-asset hardware performs its functions even when outside the
RF range of any other system component or if the facility computer network is
unavailable. Our communication infrastructure independently processes data and
executes programmable application logic, in addition to linking monitored
mobile asset data automatically to our systems database. Our server software
populates the database and is designed to mitigate the effects of any computer
outages that could affect real-time availability of the database. Finally, our
client software interfaces only with the database, not directly with our
communication infrastructure or on-asset hardware, which restricts access to,
and limits corruption of, system information and minimizes network bandwidth
usage.

Our
campus-based asset management solutions focus on two primary applications: (i)
industrial fleet management and (ii) rental fleet management. In addition to
focusing on these core applications, we have adapted, and intend to continue to
adapt, our wireless solutions to meet our customers broader asset management
needs.

Industrial
Fleet Management

Our
PowerFleet®, PowerBox and didBOX solutions for industrial fleet management
allow fleet operators to reduce operating costs and capital expenditures,
comply with certain safety regulations and enhance security.

To help
improve fleet safety and security, our PowerFleet, PowerBox and didBOX systems
provide vehicle operator access control, to ensure that only trained and
authorized personnel can use equipment, and impact sensing to assign
responsibility for abusive driving.

PowerFleet and
PowerBox also provide: electronic operator identification; automatic wireless
data communications; electronic vehicle inspection checklists for paperless
compliance with governmental safety regulations, automatic reporting of
emerging vehicle safety issues; automatic on-vehicle intervention, such as
alarms and the disabling of equipment, in response to user-definable safety and
security parameters; and remote vehicle deactivation capabilities, allowing a
vehicle to be shut down manually or automatically under defined conditions.

In addition,
our PowerFleet system is compatible with a variety of electronic driver
identification technologies and can communicate using the customers Wi-Fi
network. PowerFleet also provides indoor and outdoor vehicle/operator
visibility, through a combination of GPS and RFID technologies, and geo-fencing
to restrict vehicles from operating in prohibited areas or issue alerts upon
unauthorized entry to such areas. PowerFleet also supports additional optional
sensing elements to provide additional vehicle utilization data.

To analyze and
benchmark vehicle utilization and operator productivity, our PowerFleet and
PowerBox systems automatically record a wide range of activity and enable
detailed performance comparisons to help management make informed decisions
about vehicle and manpower allocations. This can lead to fleet and personnel
reductions as well as increases in productivity. The
PowerFleet system also provides real-time and historical visibility of vehicle
movements and other advanced asset management options.

4

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To help reduce
fleet maintenance costs, our PowerFleet and PowerBox systems can automate and
enforce preventative maintenance scheduling by:

| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | wirelessly
 uploading usage data from each vehicle;                                                                         
| |   |                                                                                                                             
| |  | automatically
 prioritizing maintenance events based on weighted, user-defined variables;                                   
| |   |                                                                                                                             
| |  | automatically
 sending reminders to individual vehicles or operators via the systems text
 messaging module;               
| |   |                                                                                                                             
| |  | enabling
 remote lock-out of vehicles overdue for maintenance; and                                                          
| |   |                                                                                                                             
| |  | allowing
 maintenance personnel to locate and retrieve vehicles due for service via the
 systems graphical viewer software.

The PowerFleet
system also enables automatic data feeds to our customers existing enterprise
maintenance software systems.

A specialized
application of our solution in the industrial fleet management and security
market is vehicle security, particularly at airports, seaports and other areas
of critical infrastructure. The Transportation Security Act of 2001 mandates
security for aircraft servicing equipment, including aircraft tow tractors,
baggage tugs, cargo loaders, catering vehicles and fuel trucks. The airport
market-specific version of our system is called AvRamp®, referencing the
aviation industry and the ramp area at airports in which aircraft servicing
equipment operates. In addition, we have developed a standalone product called SafeNavTM Powered by GarminTM, which is designed to enhance
airport safety by alerting airport vehicle operators when they are too close to active runways and taxiways.

5

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Rental
Fleet Management

Our solution
for traditional rental fleet management is designed both to enhance the
consumers rental experience and benefit the rental company by providing
information that can be used to increase revenues, reduce costs and improve
customer service. Our rental fleet management system automatically uploads
vehicle identification number, mileage and fuel data as a vehicle enters and
exits the rental lot, which can significantly expedite the rental and return
processes for travelers and provide the rental company with more timely inventory
status, more accurate billing data that can generate higher fuel-related
revenue, and an opportunity to utilize customer service personnel for more
productive activities, such as inspecting vehicles for damage and helping
customers with luggage.

In addition,
we provide a wireless solution for the relatively new concept of carsharing,
whereby a rental car company (i) positions vehicles strategically around
cities, universities and corporate campuses for shared use by its members,
(ii) remotely controls the vehicles, (iii) manages member reservations by phone
or Internet, and (iv) charges members for vehicle use by the hour. The entire
processfrom remotely controlling the car door locks to tracking car mileage
and fuel consumption to billing for the transactionare automatically conducted
by an integration of wireless vehicle management technology and the rental
companys fleet management software.

Remote
Asset Management Solutions

Our mobile
systems for managing remote, over-the-road assets are provided by Asset
Intelligence, our recently acquired subsidiary. These systems provide
mobile-asset tracking and condition-monitoring solutions to meet the
transportation markets desire for greater safety, security, and productivity
throughout global supply chains. By leveraging a combination of satellite and
cellular wireless communications and Web data management technologies, the
Asset Intelligence VeriWiseTM product family provides shippers and
carriers with tools to better manage their trailer and container fleets,
freight transport operations, and maintenance controls. VeriWise systems enable
quick access to actionable intelligence that results in better utilization,
control, and security of our customers freight-carrying assets.

Our remote
asset management systems consist of five principal elements:

| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | satellite or
 cellular communicators attached to assets;                                                                                                                                                       
| |   |                                                                                                                                                                                                                
| |  | GPS
 receivers that provide latitude/longitude location fixes that are transmitted
 based on logic resident in the communicator;                                                                               
| |   |                                                                                                                                                                                                                
| |  | proprietary
 browser-based graphical user interface that provides visibility and two-way
 control of the system database (the data can also be transmitted to the
 customer via XML or web services data feed);
| |   |                                                                                                                                                                                                                
| |  | patented
 power management intelligence to ensure reliable system performance in a
 power-starved environment; and                                                                                             
| |   |                                                                                                                                                                                                                
| |  | several
 sensor types, including cargo, temperature, and door, that provide additional
 status information for the remote asset.                                                                               

To increase
asset utilization, our VeriWise system can reduce the number of assets needed
and/or increase the revenue generated per asset by:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | monitoring
 asset pool size based on user-defined requirements;                                         
| |   |                                                                                                         
| |  | generating
 dormancy reports to flag under-utilized assets;                                             
| |   |                                                                                                         
| |  | alerting the
 driver to the location of the closest empty asset, resulting in a more rapid
 pick-up; and
| |   |                                                                                                         
| |  | providing
 trailer detention alerts when an asset has exceeded the time allotted for
 unloading.        

To better
control remote assets, our VeriWise system provides:

| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | integration
 into refrigerated asset microcontrollers to provide temperature and set point
 data and alerts via our VeriWise Intelligent Portal (VIP) or by an e-mail
 notification directly to the customer when an alarm condition develops;
| |   |                                                                                                                                                                                                                                               
| |  | change in
 cargo status of an asset via our patented full-length cargo sensor;                                                                                                                                                                
| |   |                                                                                                                                                                                                                                               
| |  | on-device geofencing
 that alerts the customer when an asset is approaching or leaving its
 destination; and                                                                                                                                  
| |   |                                                                                                                                                                                                                                               
| |  | on-board
 intelligence utilizing a motion sensor and patented logic that identifies the
 beginning of a drive and the end of a drive.                                                                                                         

To help
improve asset and cargo security, our VeriWise system offers the following
capabilities:

6

---



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | asset
 lockdown, which automatically sends an e-mail or text message to the customer
 when movement is detected outside of user-defined time periods;
| |   |                                                                                                                                                      
| |  | door sensors,
 which detect an unauthorized open door either by time or location, resulting
 in a door breach alert;                                 
| |   |                                                                                                                                                      
| |  | emergency
 track functionality that can be enabled to track an asset at more frequent
 intervals if a theft condition is expected;                   
| |   |                                                                                                                                                      
| |  | geofencing,
 which can alert our customer when an asset enters a prohibited geography or
 location; and                                              
| |   |                                                                                                                                                      
| |  | by utilizing
 our Tractor ID product notification if the incorrect tractor connects to the
 asset.                                                   

Growth Strategy

Our objective
is to become the leading global provider of wireless solutions for managing and
securing enterprise assets. To achieve this goal, we intend to:

Increase sales in
existing markets to existing customers and pursue opportunities with new
customers by:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | maintaining
 a sales and marketing team that is focused on identifying, seizing and
 managing revenue opportunities, with the primary goal of expanding our
 customer base and achieving wider market penetration;                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | utilizing a
 performance services team to (i) shorten our initial sales cycles by helping
 prospective customers identify and quantify benefits expected from our
 system, (ii) accelerate transitions from initial implementation to roll-out
 programs by helping customers achieve and prove expected system benefits, and
 (iii) build service revenue through long-term consultative engagements that
 help customers use our system to attain continuous improvements in their
 operations;
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | developing
 channel partners to provide new sales, marketing, distribution and support
 networks, especially for our PowerBox product, which is designed to be simple
 enough for industrial truck dealers to sell, install and support without
 relying on the Companys technical resources, and                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | expanding
 our resources and activities internationally, especially in Europe, where we
 believe re-packaging, promoting and supporting our products represents a
 large growth opportunity.                                                                                                                                                                                                                                                                                                     

Expand into new
applications and markets for our technology by:

| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | pursuing
 opportunities to integrate our system with computer hardware and software
 vendors, including original equipment manufacturers;
| |   |                                                                                                                                          
| |  | establishing
 relationships with global distributors to market and sell our system
 internationally; and                                 
| |   |                                                                                                                                          
| |  | pursuing
 acquisitions of companies that we believe will enhance the functionality and
 broaden the applicability of our solutions.      

7

---



Products and Services

We offer our
customers integrated wireless solutions to control, monitor, track and analyze
their enterprise assets. Our solutions are comprised of hardware and software,
as well as maintenance, support and consulting services.

Campus-Based
Fleet Management Products

On-Asset
Hardware. With a variety of mounting and
user-interface options, our on-asset hardware is designed to be installed
quickly and easily and provide an autonomous means of asset control and
monitoring. Our on-asset hardware:

| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | contains an
 integrated computer, programmed with a product-specific application, and an
 advanced wireless transceiver with a communication range of more than
 one-half mile;
| |   |                                                                                                                                                                                
| |  | controls
 equipment access with a variety of electronic interface options;                                                                                                     
| |   |                                                                                                                                                                                
| |  | is
 compatible with most existing facility access security systems;                                                                                                            
| |   |                                                                                                                                                                                
| |  | generates
 paperless electronic safety checklists via a built-in display and keypad;                                                                                           
| |   |                                                                                                                                                                                
| |  | wirelessly
 and automatically uploads and downloads data to and from other system
 components;                                                                                 
| |   |                                                                                                                                                                                
| |  | performs
 monitoring and control functions at all times, independent of RF or network
 connectivity; and                                                                       
| |   |                                                                                                                                                                                
| |  | incorporates
 a multi-voltage power supply designed to control electrical anomalies.                                                                                           

Wireless Asset
Managers. Most of our system deployments require at
least one fixed-position communication device, referred to as a Wireless Asset
Manager, to link the mobile assets being monitored with the customers computer
network or to a remotely hosted server. Our Wireless Asset Managers conduct
two-way RF communications with the assets being monitored and can communicate
on a local area network, a wide area network, or via cellular communications.
The use of Wireless Asset Managers enables flexible system configuration
options and scalability. A single Wireless Asset Manager is sufficient to
operate an entire asset management system. For expanded, real-time data
communication and location tracking, Wireless Asset Managers can be added
incrementally as needed. They also allow system settings and on-asset
functionality to be changed without physically interfacing with on-asset
hardware, which can save significant time and money.

Each of our
Wireless Asset Managers:

| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | incorporates
 an integrated computer, programmed with a product specific application, and
 an advanced wireless transceiver with a communication range of more than
 one-half mile;
| |   |                                                                                                                                                                                    
| |  | accommodates
 an unlimited number of on-asset hardware devices;                                                                                                                    
| |   |                                                                                                                                                                                    
| |  | automatically
 uploads and downloads data to and from other system components;                                                                                                     
| |   |                                                                                                                                                                                    
| |  | employs
 built-in self-diagnostic capabilities; and                                                                                                                                
| |   |                                                                                                                                                                                    
| |  | is
 configurable to achieve a wide range of asset management goals.                                                                                                                

8

---



Server
Software. Each of our system deployments requires at
least one installation of our server software, which automatically manages data
communications between the systems database and either the Wireless Asset
Managers or on-asset hardware. Our server software:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | is a set of
 Windows services;                                                                          
| |   |                                                                                                         
| |  | automatically
 processes data between our devices and system databases;                                 
| |   |                                                                                                         
| |  | actively
 polls Wireless Asset Managers to retrieve data on demand;                                     
| |   |                                                                                                         
| |  | passively
 listens to allow remote systems to initiate data communications for data
 download;          
| |   |                                                                                                         
| |  | automates
 event scheduling, including data downloads, database archiving and diagnostic
 notifications;
| |   |                                                                                                         
| |  | interfaces
 with certain existing external systems, including maintenance and training
 systems;        
| |   |                                                                                                         
| |  | supports
 remote control/management of event processes;                                                 
| |   |                                                                                                         
| |  | automatically
 performs diagnostics on system components; and                                           
| |   |                                                                                                         
| |  | automatically
 e-mails event alerts and customizable reports.                                           

Client
Software. Our client software provides an intuitive,
easy-to-use, user interface. The console is deployed either as a standard
client-server application or as a thin-client. The console interfaces only with
the system database, not directly with our communication infrastructure or
on-asset hardware, which restricts access to, and limits corruption of, system
information and minimizes network bandwidth usage. An unlimited number of
clients can be used on a network at any given time.

Our client
software:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | can show the
 location, status and inventory of vehicles  in real time and historically 
 in each area of a facility;                        
| |   |                                                                                                                                                
| |  | allows
 real-time, two-way text communications, including broadcast text paging to
 all operators simultaneously;                              
| |   |                                                                                                                                                
| |  | searches,
 sorts and analyzes assets by usage/motion time, idle time, location, status,
     group, maintenance condition and other parameters;
| |   |                                                                                                                                                
| |  | displays and
 prints predefined and ad hoc reports; and                                                                                        
| |   |                                                                                                                                                
| |  | allows
 remote access by management, customers and vendors through any Internet
 browser application.                                          

Our vehicle
management systems are available as either remotely or locally hosted solutions
to meet a wide range of customer needs and information technology requirements.
Our vehicle management systems are available as either remotely or locally hosted solutions to meet a wide range of customer needs and information technology requirements.
Our remotely hosted solutions utilize I.D. Systems commercial data center.

9

---



Remote
Asset Management Products

On-Asset Hardware.
We offer several hardware configurations to address different remote asset
types (e.g., dry van trailers, refrigerated trailers, domestic containers, and
railcars), as well as customer-specific requirements. Our on-asset hardware
options:

| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | contain an
 integrated computer programmed with a product-specific application, a
 cellular or satellite transceiver, and a GPS receiver;
| |   |                                                                                                                                          
| |  | temperature,
 door, cargo, or tractor ID sensors mounted on the asset;                                                                   
| |   |                                                                                                                                          
| |  | solar panels
 and circuitry to maintain the charge of the on-asset devices battery pack;                                                
| |   |                                                                                                                                          
| |  | either
 sealed lead acid or lithium battery packs to power the hardware when
 untethered from a power source; and                        
| |   |                                                                                                                                          
| |  | a wire
 harness to connect to an existing power source (e.g., on the tractor).                                                           

Client Website. The
VeriWise Intelligence Portal (VIP) is a hosted website that provides Internet
access to client asset information. Upon installation of the on-asset hardware,
the customer is provided access to the VIP site where they can configure the
hardware, establish user passwords, IDs, and access privileges. Our client
website:

| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | displays a
 user-configurable dashboard highlighting the enterprise critical asset
 information;                                                           
| |   |                                                                                                                                                            
| |  | has the
 ability to e-mail the dashboard to a distribution list at a time interval
 established by the client;                                             
| |   |                                                                                                                                                            
| |  | provides
 asset status and history including location, landmark, and sensor
 information;                                                                  
| |   |                                                                                                                                                            
| |  | provides
 latitude/longitude location information for each asset based on reverse
 geocodes;                                                               
| |   |                                                                                                                                                            
| |  | displays
 asset location on a geographic map;                                                                                                              
| |   |                                                                                                                                                            
| |  | generates
 user configurable reports that can be accessed via the website or e-mailed to
 a distribution list at a time interval established by the client;
| |   |                                                                                                                                                            
| |  | allows the
 client to ping an asset to receive an updated location report; and                                                                           
| |   |                                                                                                                                                            
| |  | allows the
 client to set a unit(s) to Emergency Track, which increases the reporting
 frequency for a specified time-period.                            

Direct Data Feed. In
addition to the asset information provided on the VIP website, we also offer a
direct feed of the data to the customer via XML or web services. The feed
complies with established industry conventions, such as TTIS (trailer tracking
interface standard), to allow for easy integration into the clients legacy
system or to third-party software packages.

Services

Maintenance
Service. We provide a warranty on all hardware and
software components of our system. During the warranty period, we either
replace or repair defective hardware. We also make extended maintenance
contracts available to customers and offer ongoing maintenance and support on a
time and materials basis. Pricing for our extended maintenance and support
contracts is dependent upon the level of service we expect to provide. Our
maintenance and support services typically include remote system monitoring,
help desk technical support, escalation procedure development and routine
diagnostic data analysis. Expenses to fulfill our warranty obligations have
historically been minimal.

Customer
Support and Consulting Services. We have developed a
framework for the various phases of system training and support that offers our
customers both structure and flexibility. Major training phases include
hardware installation and troubleshooting, software installation and
troubleshooting, train-the-trainer training on asset hardware operation,
preliminary software user training, system administrator training, information
technology issue training, ad hoc training during system launch and advanced
software user training. These services are priced based on the extent of
training that the customer requests.

Following
system launch and advanced training, we make additional, refresher training
available for a fee, either at the customers site or at our offices. The
customer may also elect to purchase additional training as part of a larger
extended maintenance contract.

To help our
customers derive the most benefit from our system, we supply a broad range of
support documentation and provide initial post-launch data consulting. Our
support documentation includes hardware user guides, software manuals, vehicle
installation overviews, troubleshooting guides and issue escalation procedures.
Our initial data consulting is intended to help the customer determine which
reports and charts are most meaningful to different system users and which
specific data may represent cost-saving or productivity-enhancing
opportunities.

We have
provided our consulting services, both as a stand-alone service to study the
potential benefits of implementing a wireless fleet management system, and as
part of the system implementation itself.

In certain
instances, customers prepay us for extended maintenance, support and consulting
services. In those instances, the payment amount is recorded as deferred
revenue and revenue is recognized over the service period.

10

---



Sales and Marketing

Our sales and
marketing objective is to achieve broad market penetration, with an emphasis
both on expanding business opportunities with existing customers and on
securing new customers.

We market our
systems directly to commercial and government organizations and through
indirect sales channels, such as industrial equipment dealers. In addition, we
are actively pursuing strategic relationships with key companies in our target
markets  including original equipment manufacturers, complementary hardware
and software vendors, and service providers  to further penetrate these
markets by embedding our products in the assets our systems monitor and
integrating our solutions with other systems.

We sell our
systems to both executive and division-level management. Typically, our initial
system deployment serves as a basis for potential expansion across the
customers organization.

We work
closely with customers to help maximize the utilization and benefits of our
system and demonstrate the value of enterprise-wide deployments.

Customers

We market and
sell our wireless solutions to a wide range of customers in the commercial and
government sectors. Our customers operate in diverse markets, such as
automotive manufacturing, retailers, shippers, freight transportation
companies, heavy industry, retail and wholesale distribution, aerospace and
defense, homeland security and vehicle rental.

During the
year ended December 31, 2010, we generated revenues of $25.9 million, including
$15.2 million of revenue from AI (which we acquired on January 7, 2010), and
Wal-Mart Stores, Inc. accounted for 26% of our revenues. During the year ended December 31, 2010, no other
customer accounted for more than 10% of our revenues. During the year ended
December 31, 2009, we generated revenues of $10.3 million and the U.S. Postal
Service, Wal-Mart Stores, NACCO Materials Handling Group, Inc. and Ford Motor
Company accounted for 20%, 15%, 15%, and 14%, respectively, of our revenues.
During the year ended December 31, 2008, the U.S. Postal Service and Wal-Mart
Stores, Inc. accounted for 42% and 41%, respectively, of our revenues.

The Company
enters into master agreements with its customers in the normal course of its
business. These agreements define the terms of any sales of products and/or
services by the Company to the applicable customer, including, but not limited
to, terms regarding payment, support services, termination and assignment
rights. These agreements generally obligate the Company only when products or
services are actually sold to the customer thereunder.

We strive to
establish long-term relationships with our customers in order to maximize
opportunities for new application development and increased sales.

11

---



Competition

The market for
our solutions is rapidly evolving, highly competitive and fragmented. Our
target markets are also subject to quickly changing product technologies,
shifting customer needs, regulatory requirements and frequent introductions of
new products and services. A significant number of companies have developed or
are developing and marketing software and hardware for wireless products that
currently compete or will compete directly with our solutions. We compete with
organizations varying in size, including many small, start-up companies as well
as large, well-capitalized organizations. While some of our competitors focus
exclusively on providing wireless asset management solutions, many are involved
in wireless technology as an extension of a broader business. Many of our
larger competitors are able to dedicate extensive financial resources to the
research and development and deployment of wireless solutions. As government
and commercial entities expand the use of wireless technologies, we expect that
competition will continue to increase within our target markets.

We distinguish
ourselves from our competitors by focusing on three primary applications: (i)
industrial fleet management, (ii) rental fleet management, and (iii) remote
transportation asset management. This focus has enabled us to direct product
development efforts specifically suited for our target markets. Our on-asset
devices are designed to operate independently of other system components,
allowing for continuous asset control and data gathering even when the asset is
out of wireless communication range. We believe that our proprietary technology
as well as our experience in designing and developing products for our target
markets distinguishes us within these markets.

In each of our
markets, we encounter different competitors due to the competitive dynamics of
each segment. In the industrial fleet management market, the wireless control,
tracking and management of enterprise assets is relatively new. Although we are
not aware of any current competitors that provide the precise capabilities of
our systems, we are aware of competitors that offer subsets of our system
capabilities or alternate approaches to the needs our products address. Those
companies include both emerging companies with limited operating histories,
such as ShockWatch, a division of Media Recovery Inc., and Access Control
Group, and companies with longer operating histories, greater name recognition
and/or significantly greater financial, technical and marketing resources than
ours, such as Crown Equipment Corp., Savi Technology (which was acquired by
Lockheed Martin Company), Symbol Technologies (which was acquired by Motorola,
Inc.), Intermec, Inc. and Zebra Enterprise Solutions, a division of Zebra
Technologies Corporation.

In the rental
fleet management market, we compete primarily against handheld device companies
that currently provide the solutions used by vehicle rental companies.
Currently, our principal competitors in this market are handheld device
providers, such as Motorola, and other wireless technology companies, such as
Zebra Enterprise Solutions, a division of Zebra Technologies Corporation.
Although handheld device providers currently control the majority of the rental
fleet market, we believe a shift to other wireless technologies, such as our
patented rental fleet management system, represents a compelling opportunity for
vehicle rental companies, with the potential to increase both operating
efficiency and customer satisfaction. Because of these potential benefits, we
believe our market-focused product development strategy, portfolio of
intellectual property and proven system efficacy are key competitive advantages
in this market.

In the remote
transportation asset management market, we compete against several established
competitors, including Qualcomm Incorporated, SkyBitz, Inc., Par Technology Corporation
    and StarTrak Systems, LLC which was acquired by Orbcomm Inc. We attempt to
    differentiate our solutions in this segment by offering a choice of communication
    mode (satellite or cellular), sensor options (door, cargo, tractor ID), and
    installation configurations (dry van trailers, refrigerated trailers, domestic
    containers, flatbed trailers, covered hopper and tanker railcars, and chassis).

12

---



Research and Development

Our research and development team has expertise in areas such
    as software and firmware  development, database design and data analytics,
    wireless communications, mechanical and electrical  engineering, product
    marketing and product management. In addition, we utilize external contractors
     to supplement our team in the areas of software development, digital design,
    and product testing.

We spent $2.9 million, $2.6 million, and $4.4 million for research and development
during the years ended December 31, 2008, 2009, and 2010, respectively.  The increase in 2010 is
primarily attributable to the acquisition of Asset Intelligence, and its associated product development activities.

Generally, our research and development efforts are focused on:  simplifying the implementation,
support and utilization of our systems; reducing the cost of our systems; expanding the functionality of
our systems to meet customer and market requirements; improving our products by applying new advances in technology;
and building further competitive advantages through our intellectual property portfolio.

In 2010, we focused our research and development investments in several key areas:

| |   |                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the transition of our wireless industrial vehicle management system to a more
plug-and-play solution, with easier installation and support requirements, to stimulate more
widespread use of our technology on a broader range of equipment;                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | the further enhancement of the Wi-Fi version of our vehicle management system,
leveraging the distributed intelligence of our patented system design to overcome many of the
limitations of other Wi-Fi systems and provide a uniquely flexible, secure solution for customers
who wish to integrate our system into their existing 802.11 b/g wireless infrastructure;
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | the development and deployment of an I.D. Systems-hosted vehicle management solution,
incorporating a hybrid of RF and cellular communications technologies, which makes it easier for customers to
acquire, deploy and support our system without relying on their own information technology resources;                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | the further adaptation of our wireless asset management technology
     to meet the  needs of the emerging markets for airport vehicle security
     and rental car management;                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | the broadening of our product line for the over-the-road asset management market; and                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | the continued development of specific features and data interfaces for our
solutions to meet the individual requirements of large customers.                                                                                                                                                                                                                             

Specifically, we developed and introduced several new products in 2010 to
expand the markets and applications addressed by I.D. Systems solutions:

| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the PowerBox industrial vehicle management system, a hosted, out-of-the-box
solution designed to simplify system acquisition, deployment and benefit achievement for customers
with small to medium fleets, or larger fleets with basic vehicle management requirements;                                                       
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | SafeNav Powered by Garmin, an on-vehicle, GPS-based navigation and
alert system designed to provide airport vehicle operators with real-time situational awareness,
with the goal of avoiding accidental runway incursions;                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | a new generation of our patented Rental Fleet Management system that can be
integrated with any vehicles diagnostic data port to provide both traditional airport-based
rental fleet management and a remote, charge-by-the-hour car-sharing solution;                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | VeriWise Track & Trace, a low-cost, long-life cellular
product with flexible mounting options and simple installation, aimed at trailer and container
location tracking, theft countermeasures, and short-term asset analytics;                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | VeriWise Intermodal, a satellite-based container management system
with patented solar energy management, cargo detection, and motion sensing, which enables
reliable visibility of asset status for faster container turns, improved cargo security,
and optimal fleet efficiency; and                                       
| |   |                                                                                                                                                                                                                                                                                                                                
| |  | VeriWise Reefer, a refrigerated trailer management solution,
which has been integrated with both Thermo King and Carrier, the worlds leading reefer manufacturers,
to enable users to manage temperature set points remotely and react to problems quickly,
with real-time alerts based on automatic exception data analysis.

Intellectual Property

Patents

We attempt to protect our technology and products through a variety of intellectual property protections,
including the pursuit of patent protection in the United States and certain foreign jurisdictions.
Because of the differences in patent laws and laws concerning proprietary rights, the extent of
protection provided by U.S. patents or proprietary rights owned by us may differ from that of their foreign counterparts.

I.D. Systems has built a portfolio of patents and patent applications
    relating to various aspects of its technology and products. As of March 30,
    2011, I.D. Systems has 14 U.S. patents, 17 pending U.S. patent applications,
    and 1 pending PCT application. With the timely payment of all maintenance
    fees, the U.S. patents have expiration dates falling between 2014 and 2026.
    I.D. Systems also has foreign patents and pending applications relating to
    its wireless asset management system, and pending applications relating to
    its mobile RFID portal. No single patent or patent family is considered material
to the I.D. Systems business.

Asset Intelligence also utilizes patents to protect aspects of its intellectual property assets.
The AI patent portfolio focuses on methods, systems, and devices for managing mobile assets and
reducing power consumption in mobile assets.  The AI patent portfolio currently includes 16 pending
applications and 47 granted patents and allowed applications in the U.S. and in foreign jurisdictions.
The granted patents have expiration dates falling between 2014 and 2028.  No single patent or family of
patents is considered material to the AI business.

13

---



Trademarks

We have, or have applied
for, trademark protection for I.D. Systems, Inc.®, Vehicle Asset Communicator®,
ChaMP®, Wireless Asset Net®, AvRamp®, Opti-Kan®,
WiFree®, Intelli-Listening®, SecureStream®, PowerFleet®, INTELLIPOINT®,
PowerKey®, SafeNav, and VeriWiseTM.

We attempt to avoid
infringing known proprietary rights of third parties in our product development
and sales efforts. However, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous
patent applications pending, many of which are confidential at the time of the
application filing, with regard to similar technologies. If we were to discover
that our products violate third-party proprietary rights, we may not be able
to:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | obtain licenses to
 continue offering such products without substantial reengineering;                  
| |   |                                                                                                         
| |  | reengineer our products
 successfully to avoid infringement;                                            
| |   |                                                                                                         
| |  | obtain licenses on
 commercially reasonable terms, if at all; or                                        
| |   |                                                                                                         
| |  | litigate an alleged
 infringement successfully or settle without substantial expense and damage
 awards.

Any claims against us
relating to the infringement of third-party proprietary rights, even if without
merit, could result in the expenditure of significant financial and managerial
resources or in injunctions preventing us from distributing certain products.
Such claims could materially adversely affect our business, financial condition
and results of operations.

Our software products are
susceptible to unauthorized copying and uses that may go undetected, and
policing such unauthorized use is difficult. In general, our efforts to protect
our intellectual property rights through patent, copyright, trademark and trade
secret laws and contractual safeguards may not be effective to prevent
misappropriation of our technology, or to prevent the development and design by
others of products or technologies similar to or competitive with those
developed by us. Our failure or inability to protect our proprietary rights
could materially adversely affect our business, financial condition and results
of operations.

14

---



Manufacturing

We outsource our hardware
manufacturing operations to leading contract manufacturers, such as Flextronics
International Ltd. This strategy enables us to focus on our core competencies 
designing hardware and software systems and delivering solutions to customers 
and avoid investing in capital-intensive electronics manufacturing
infrastructure. Outsourcing also provides us with the ability to ramp up
deliveries to meet increases in demand without increasing fixed expenses.

Our manufacturers are
responsible for obtaining the necessary components and supplies to manufacture
our products. While components and supplies are generally available from a
variety of sources, manufacturers generally depend on a limited number of
suppliers. In the past, unexpected demand for communication products has caused
worldwide shortages of certain electronic parts and allocation of such parts by
suppliers that had an adverse impact on the ability of manufacturers to deliver
products as well as on the cost of producing such products.

Due to the general
availability of manufacturers for our products, we do not believe that the loss
of any of our manufacturers would have a long-term material adverse effect on
our business, although there could be a short-term adverse effect on our
business.

We generally attempt to
maintain sufficient inventory to meet customer demand for products, as well as
to meet anticipated sales levels. If our product mix changes in unanticipated
ways, or if sales for particular products do not materialize as anticipated, we
may have excess inventory or inventory that becomes obsolete. In such cases,
our operating results could be negatively affected.

Government Regulations

The use of radio emissions
is subject to regulation in the United States by various federal agencies,
including the Federal Communications Commission, or FCC, and the Occupational
Safety and Health Administration, or OSHA. Various state agencies also have
promulgated regulations which concern the use of lasers and
radio/electromagnetic emissions standards.

Regulatory changes in the
United States and other countries in which we may operate in the future could
require modifications to some of our products in order for us to continue
manufacturing and marketing our products in those areas.

Our products intentionally
transmit radio signals, including narrow band and spread spectrum signals, as
part of their normal operation. We have obtained certification from the FCC for
our products that require certification. Users of these products in the United
States do not require any license from the FCC to use or operate our products.
To market and sell our integrated wireless solutions in the European Union, we
also utilize unlicensed radio spectra, and have obtained the required European
Norm (EN) certifications.

In addition, some of our
operations use substances regulated under various federal, state and local laws
governing the environment and worker health and safety, including those
governing the discharge of pollutants into the ground, air and water, the
management and disposal of hazardous substances and wastes and the cleanup of
contaminated sites. Certain of our products are subject to various federal,
state and local laws governing chemical substances in electronic products.

The adoption of unfavorable
regulations, or unfavorable interpretations of existing regulations by courts
or regulatory bodies, could require us to incur significant compliance costs,
cause the development of the affected markets to become impractical or
otherwise adversely affect our ability to produce or market our products.

Employees

As of March 9, 2011, we had
86 full-time employees, including five employees based in Germany and the
United Kingdom, of which 20 were engaged in customer service, 12 in product
development (which includes engineering), 5 in new product management, 9 in operations,
    18 in sales and marketing, 8 in information technology and 14 in finance
    and administration. We believe that our relationships with our employees
    are good.

As a result of the
integration of AI, the Company eliminated 39 positions during 2010,
representing approximately 32% of our total personnel. In order to earn a
severance payment, affected employees were required to complete their
transition duties and execute a general release agreement. Total severance
costs incurred during the year ended December 31, 2010 were $487,000, of
which $100,000 is included in research and development expenses and $387,000 is
included in selling, general and administrative expenses in the consolidated
statement of operations. As of December 31, 2010, these costs have been
paid.

Available Information

Our primary website is www.id-systems.com.
We make available on this website, free of charge, our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such
material with, or furnish such information to, the Securities and Exchange
Commission (SEC). We also make available on this website, free of charge, our
Code of Ethics for Senior Financial Officers, which applies to our principal
executive officer, principal financial officer and principal accounting
officer.

15

---



Item 1A. Risk
Factors

In addition to the other information contained in this
Annual Report on Form 10-K, the following risk factors should be considered
carefully in evaluating the Companys business. Our business, financial
condition or results of operations could be materially and adversely affected
by any of these risks. Additional risks not presently known to the Company or
that the Company currently deems immaterial may also adversely affect its
business, financial condition or results of operations.

We have incurred significant losses and have a substantial
accumulated deficit. If we cannot achieve profitability, the market price of
our common stock could decline significantly.

We incurred net losses of
approximately $4.2 million, $13.2 million and $12.6 million for the years ended
December 31, 2008, 2009 and 2010, respectively, and have incurred additional
net losses since inception. At December 31, 2010, we had an accumulated deficit
of approximately $49.5 million. Our ability to increase our revenues from the
sale of our products will depend on our ability to successfully implement our
growth strategy and the continued expansion of our markets. If our revenues do
not grow or if our operating expenses continue to increase, we may not be able
to become profitable and the market price of our common stock could decline
further.

We are highly dependent upon sales of our wireless asset
management system to a few customers. The loss of any of these customers, or
any material reduction in the amount of our products they purchase, could
materially and adversely affect our financial condition and results of
operations.

During the year ended
December 31, 2010, we generated revenues of $25.9 million and the Wal-Mart
Stores, Inc. accounted for 26% of our revenues. During the year ended December
31, 2009, we generated revenues of $10.3 million and the U.S. Postal Service,
Wal-Mart Stores Inc., NACCO Materials Handling Group, Inc. and Ford Motor
Company accounted for 20%, 15%, 15%, and 14% of our revenues, respectively.
During the year ended December 31, 2008, the U.S. Postal Service and Wal-Mart
Stores, Inc. accounted for 42% and 41% of our revenues, respectively. Some of
these and other customers operate in markets that have suffered business
downturns in the past few years or may so suffer in the future. The loss of or
any material reduction in the amount of our products that these customers
purchase, or any material adverse change in the financial condition of such
customers, could materially and adversely affect our financial condition and
results of operations. If we are unable to replace such revenue from existing
or new customers, the market price of our common stock could decline
significantly.

If the market for our technology does not develop or become
sustainable, expands more slowly than we expect or becomes saturated, our
revenues will decline and our financial condition and results of operations
could be materially and adversely affected.

Our success is highly
dependent on the continued market acceptance of our wireless asset management
system. The market for our wireless products and services is new and rapidly
evolving. If the market for our products and services does not become
sustainable, or becomes saturated with competing products or services, our
revenues will decline and our financial condition and results of operations
could be materially and adversely affected.

If we are unable to keep up with rapid technological change,
we may be unable to meet the needs of our customers, which could materially and
adversely affect our financial condition and results of operations and reduce
our ability to grow our market share.

Our market is characterized
by rapid technological change and frequent new product announcements.
Significant technological changes could render our existing technology
obsolete. We are active in the research and development of new products and
technologies and in enhancing our current products. However, research and
development in our industry is complex and filled with uncertainty. For
example, it is common for research and development projects to encounter delays
due to unforeseen problems, resulting in low initial volume production, fewer
product features than originally considered desirable and higher production
costs than initially budgeted, any of which may result in lost market
opportunities. In addition, these new products may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of
market acceptance. If our efforts do not lead to the successful development,
marketing and release of new products that respond to technological
developments or changing customer needs and preferences, our revenues and
market share could be materially and adversely affected. We may expend a
significant amount of resources in unsuccessful research and development
efforts. In addition, new products or enhancements by our competitors may cause
customers to defer or forego purchases of our products. Any of the foregoing
could materially and adversely affect our financial condition and results of
operations and reduce our ability to grow our market share.

16

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The long and variable sales cycles for our solutions may
cause our revenues and operating results to vary significantly from quarter to
quarter or year to year, which could adversely affect the market price of our
common stock.

We expect that many
customers who utilize our solutions will do so as part of a large-scale
deployment of these solutions across multiple or all divisions of their
organizations. A customers decision to deploy our solutions throughout its
organization will involve a significant commitment of its resources.
Accordingly, initial implementations may precede any decision to deploy our solutions
enterprise-wide. Throughout this sales cycle, we may spend considerable time
and expense educating and providing information to prospective customers about
the benefits of our solutions.

The timing of the deployment
of our solutions may vary widely and will depend on the specific deployment
plan of each customer, the complexity of the customers organization and the
difficulty of such deployment. Customers with substantial or complex
organizations may deploy our solutions in large increments on a periodic basis.
Accordingly, we may receive purchase orders for significant dollar amounts on
an irregular and unpredictable basis. Because of our limited operating history
and the nature of our business, we cannot predict the timing or size of these
sales and deployment cycles. Long sales cycles, as well as our expectation that
customers will tend to place large orders sporadically with short lead times,
may cause our revenue and results of operations to vary significantly and
unexpectedly from quarter to quarter. These variations could materially and
adversely affect the market price of our common stock.

17

---



If we are unable to protect our intellectual property rights,
our financial condition and results of operations could be materially and
adversely affected.

We rely on a combination of
patents, copyrights, trademarks, trade secrets and contractual measures to
protect our intellectual property rights. Third parties may seek to challenge,
invalidate, circumvent or render unenforceable any patents or proprietary
rights owned by us. If such challenges are successful, our business will be
materially and adversely affected.

Our employees, consultants
and advisors enter into confidentiality agreements with us that prohibit the
disclosure or use of our confidential information. We also have entered into
confidentiality agreements to protect our confidential information delivered to
third parties for research and other purposes. Despite these efforts, we cannot
assure you that we will be able to effectively enforce these agreements or our
confidential information will not be disclosed, that others will not
independently develop substantially equivalent confidential information and
techniques or otherwise gain access to our confidential information or that we
can meaningfully protect our confidential information.

Disputes may arise in the
future with respect to the ownership of rights to any technology developed with
advisors or collaborators. These and other possible disagreements could lead to
delays in the collaborative research, development or commercialization of our
systems, or could require or result in costly and time-consuming litigation
that may not be decided in our favor. Any such event could materially and
adversely affect our financial condition and results of operations.

Policing the unauthorized
use of our intellectual property is difficult, and we cannot assure you that
the steps we have taken will prevent unauthorized use of our technology or
other intellectual property, particularly in foreign countries where the laws
may not protect our proprietary rights as fully as in the United States.
Accordingly, we may not be able to protect our proprietary rights against
unauthorized third party copying or use. If we are unsuccessful in protecting
our intellectual property, we may lose any technological advantages we have
over competitors and our financial condition and results of operations could be
materially and adversely affected.

We may become involved in an intellectual property dispute
that could subject us to significant liability, divert the time and attention
of our management and prevent us from selling our products, any of which could
materially and adversely affect our financial condition and results of
operations.

In recent years, there has
been significant litigation in the United States and internationally involving
claims of alleged infringement of patents and other intellectual property
rights. Litigation may be necessary to enforce our intellectual property
rights, defend ourselves against alleged infringement and determine the scope
and validity of our intellectual property rights.

Any such litigation, whether
or not successful, could result in substantial costs, divert the time and
attention of our management and prevent us from selling our products. If a
claim of patent infringement was decided against us, we could be required to,
among other things:

| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pay substantial damages to
 the party making such claim;                                                                                                                                                         
| |   |                                                                                                                                                                                                                  
| |  | stop selling, making,
 having made or using products or services that incorporate the challenged
 intellectual property;                                                                                         
| |   |                                                                                                                                                                                                                  
| |  | obtain from the holder of
 the infringed intellectual property right a license to sell, make or use the
 relevant technology, which license may not be available on commercially
 reasonable terms, or at all; or
| |   |                                                                                                                                                                                                                  
| |  | redesign those products or
 services that incorporate such intellectual property.                                                                                                                                

The failure to obtain the
necessary licenses or other rights could preclude the sale, manufacture or
distribution of our products and could materially and adversely affect our
financial condition and results of operations.

18

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The U.S. governments right to use technology developed by us
with government funds could limit our intellectual property rights.

We have developed, and may
in the future develop, improvements to our technology that are funded in part
by the U.S. government. As a result, we do not have the right to prohibit the
U.S. government from using certain technologies developed by us with such
government funds or to prohibit third parties from using those technologies to
provide products and services at the request of the U.S. government. Although
such government rights do not affect our ownership of the technology developed
using such funds, the U.S. government has the right to royalty-free use of
technologies that we have developed under such contracts. We are free to
commercially exploit those government-funded technologies and may assert our
intellectual property rights to seek to block other non-government users
thereof, but we cannot assure you that we can successfully do so.

We rely on subcontractors to manufacture and deliver our
products. Any quality or performance failures by our subcontractors or changes
in their financial condition could disrupt our ability to supply quality
products to our customers in a timely manner, resulting in business
interruptions, increased costs, claims for damages, reputation damage and
reduced revenue.

In order to meet the
requirements under our customer contracts, we rely on subcontractors to
manufacture and deliver our products to our customers. Any quality or
performance failures by our subcontractors or changes in their financial or
business condition could disrupt our ability to supply quality products to our
customers in a timely manner. If we are unable to fulfill orders from our
customers in a timely manner, we could experience business interruptions,
increased costs, damage to our reputation and loss of our customers. In
addition, we may be subject to claims from our customers for failing to meet
our contractual obligations. Although we have several sources for production,
the inability to provide our products to our customers in a timely manner could
result in the loss of customers and our revenues could be materially reduced.
In addition, there is great competition for the most qualified and competent
subcontractors. If we are unable to hire qualified subcontractors, the quality
of our services and products could decline. Furthermore, third-party
manufacturers in the electronic component industry are consolidating. The
consolidation of third-party manufacturers may give remaining manufacturers
greater leverage to increase the prices that they charge, thereby increasing
our manufacturing costs. If we are unable to pass the increased costs onto our
customers, our profitability could be materially and adversely affected.

We rely on a limited number of suppliers for several
significant components and raw materials used in our products. If we are unable
to obtain these components or raw materials on a timely basis, we will be
unable to meet our customers orders, which could reduce our revenues, subject
us to claims for damages and adversely affect our relationships with our
customers.

We rely on a limited number
of suppliers for the components and raw materials used in our products,
including Flextronics. Although there are many suppliers for most of our
component parts and raw materials, we are dependent on a limited number of
suppliers for many of our significant components and raw materials. This
reliance involves a number of significant risks, including:

| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unavailability of
 materials and interruptions in delivery of components and raw materials from
 our suppliers, which could result in manufacturing delays; and
| |   |                                                                                                                                                                
| |  | fluctuations in the
 quality and price of components and raw materials.                                                                                        

We currently do not have any
long-term or exclusive purchase commitments with any of our suppliers. In
addition, our suppliers may enter into exclusive arrangements with our
competitors, be acquired by our competitors, or stop selling their products or
components to us at commercially reasonable terms or at all. We may not be able
to develop alternative sources for the components and raw materials. Even if
alternate suppliers are available to us, identifying them is often difficult
and time consuming. If we are unable to obtain an ample supply of product or
raw materials from our existing suppliers or alternative sources of supply, we
may be unable to satisfy our customers orders, which could reduce our
revenues, subject us to claims for damages and adversely affect our
relationships with our customers.

If we lose our executive officers, or are unable to recruit
additional personnel, our ability to manage our business could be materially
and adversely affected.

We are dependent on the
continued employment and performance of our executive officers. We currently do
not have employment agreements with any of our executive officers. Like other
companies in our industry, we face intense competition for qualified personnel.
Many of our competitors have greater resources than we have to hire qualified
personnel. Accordingly, if we are not successful in attracting or retaining
qualified personnel in the future, our ability to manage our business could be
materially and adversely affected.

19

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The industry in which we operate is highly competitive, and
competitive pressures from existing and new companies could have a material
adverse effect on our financial condition and results of operations.

The industry in which we
operate is highly competitive and influenced by the following:

| |   |                                                               
| | - | --------------------------------------------------------------
| |  | advances in technology;                                       
| |   |                                                               
| |  | new product introductions;                                    
| |   |                                                               
| |  | evolving industry
 standards;                                 
| |   |                                                               
| |  | product improvements;                                         
| |   |                                                               
| |  | rapidly changing customer
 needs;                             
| |   |                                                               
| |  | intellectual property
 invention and protection;              
| |   |                                                               
| |  | marketing and distribution
 capabilities;                     
| |   |                                                               
| |  | ability to attract and retain highly
 skilled professionals;  
| |   |                                                               
| |  | competition from highly
 capitalized companies;               
| |   |                                                               
| |  | entrance of new
 competitors;                                 
| |   |                                                               
| |  | ability of customers to
 invest in information technology; and
| |   |                                                               
| |  | price competition.                                            

The products marketed by us
and our competitors are becoming more complex. As the technological and
functional capabilities of future products increase, these products may begin
to compete with products being offered by traditional computer, network and
communications industry participants that have substantially greater financial,
technical, marketing and manufacturing resources than we do.

Although we are not aware of
any current competitors that provide the precise capabilities of our systems,
we are aware of competitors that offer subsets of our system capabilities or
alternate approaches to the needs our products address. Those companies include
both emerging companies with limited operating histories, such as ShockWatch, a
division of Media Recovery, Inc., and Access Control Group L.L.C., and
companies with longer operating histories, greater name recognition and/or
significantly greater financial, technical and marketing resources than ours,
such as Crown Equipment Corp., Savi Technology, Inc., which was acquired by
Lockheed Martin Company, Symbol Technologies, Inc., which was acquired by
Motorola, Inc., Intermec, Inc. and Zebra Enterprise Solutions, a division of
Zebra Technologies Corporation.

In the rental fleet
management market, we compete primarily against handheld device companies that
currently provide the solutions used by vehicle rental companies. Currently,
our principal competitors in this market are handheld device providers, such as
Motorola, and other wireless technology companies, such as Zebra Enterprise
Solutions, a division of Zebra Technologies Corporation. Although handheld
device providers currently control the majority of the rental fleet market, we
believe a shift to other wireless technologies, such as our patented rental
fleet management system, represents a compelling opportunity for vehicle rental
companies, with the potential to increase both operating efficiency and
customer satisfaction. Because of these potential benefits, we believe our
market-focused product development strategy, portfolio of intellectual property
and proven system efficacy are key competitive advantages in this market.

In the remote transportation
asset management market, we compete against several established competitors,
including Qualcomm Incorporated , SkyBitz, Inc., Par Technology Corporation and
    StarTrack Systems, LLC which was acquired by Orbcomm Inc. We attempt
    to differentiate our solutions in this segment by offering a choice of communication
    mode (satellite or cellular), sensor options (door, cargo, tractor ID), and
    installation configurations (dry van trailers, refrigerated trailers, domestic
    containers, flatbed trailers, covered hopper and tanker railcars, and chassis).

If we do not keep pace with
product and technology advances, including the development of superior products
by our competitors, or if we are unable to otherwise compete successfully
against our competitors, there could be a material adverse effect on our
competitive position, revenues and prospects for growth. As a result, our
financial condition and results of operations could be materially and adversely
affected.

20

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Our recent employee layoff may disrupt, hinder or delay our
business activities.

As a result of the
integration of Asset Intelligence, we eliminated 39 positions within our
company by the third quarter of 2010, representing approximately 32% of our
total personnel. Although we have reassigned the duties associated with these
eliminated positions to other personnel, inefficiencies related to task unfamiliarity,
heavier workloads, potential loss of knowledge and unfilled gaps may arise,
especially if we are unable to effectively manage and implement the transition.
Any such inefficiency may cause disruption or delay in our business activities.

The federal government or independent standards organizations
may implement significant regulations or standards that could adversely affect
our ability to produce or market our products.

Our products transmit radio
frequency waves, the transmission of which is governed by the rules and
regulations of the FCC, as well as other federal and state agencies. Our
ability to design, develop and sell our products will continue to be subject to
these rules and regulations for the foreseeable future. In addition, our products
and services may become subject to independent industry standards. The
implementation of unfavorable regulations or industry standards, or unfavorable
interpretations of existing regulations by courts or regulatory bodies, could
require us to incur significant compliance costs, cause the development of the
affected products to become impractical or otherwise adversely affect our
ability to produce or market our products. The adoption of new industry
standards applicable to our products may require us to engage in rapid product
development efforts that would cause us to incur higher expenses than we
anticipated. In some circumstances, we may not be able to comply with such
standards, which could materially and adversely affect our ability to generate
revenues through the sale of our products.

Because our products are complex, they may have undetected
errors or failures when they are introduced that could seriously harm our
business.

Technical products like ours
often contain undetected errors or failures when first introduced. Despite our
efforts to eliminate these flaws, there still may be flaws in our products,
even after the commencement of commercial shipments. Because our products are
used in business-critical applications, we could be subject to product
liability claims if our systems fail to perform as intended. Even unsuccessful
claims against us could result in costly litigation and the diversion of
managements time and resources and could damage our reputation and impair the
marketability of our systems. Although we maintain insurance, we cannot assure
you that:

| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | our insurance will provide
 adequate coverage against potential liabilities if our products cause harm or
 fail to perform as promised; or
| |   |                                                                                                                                           
| |  | adequate product liability
 insurance will continue to be available to us in the future on commercially
 reasonable terms or at all.      

If our insurance is
insufficient to pay any product liability claims, our financial condition and
results of operations could be materially and adversely affected. In addition,
any such claims could permanently injure our reputation and customer
relationships.

We may need to obtain additional capital to fund our
operations that could have negative consequences on our business.

We may require
additional capital in the future to develop and commercialize additional
products and technologies or take advantage of other opportunities that may
arise, including potential acquisitions. We may seek to raise the necessary
funds through public or private equity offerings, debt financings or strategic
alliances and licensing arrangements. To the extent we raise additional capital
by issuing equity securities, our existing stockholders may experience
substantial dilution. If additional capital is raised through debt, such debt may
subject us to significant restrictive covenants that could affect our ability
to operate our business. In addition, we may be required to relinquish rights
to our technologies or systems, or grant licenses on terms that are not
favorable to us in order to raise additional funds through strategic alliance,
joint venture and licensing arrangements. If adequate funds are not available,
we may be required to delay, reduce the scope of or eliminate one or more of
our development programs, and our business, financial condition, results of
operations and stock price could be materially and adversely affected.

21

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If we do not adequately anticipate and
respond to the risks inherent in growing our business internationally, our
operating results and the market price of our common stock could be materially
and adversely affected.

To date, we have not
generated significant revenues outside of North America. As part of our growth
strategy, we are seeking ways to expand our operations outside of North America
by establishing offices in the United Kingdom and Europe and developing
relationships with global distributors to market and sell our systems
internationally. For example, as of March 9, 2011, we had three employees in
Germany and two in the United Kingdom who market and sell our systems in
Europe. There are a number of risks inherent in doing business in international
markets, including:

| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | unexpected legal or
 regulatory changes;                                                   
| |   |                                                                                            
| |  | unfavorable political or
 economic factors;                                                
| |   |                                                                                            
| |  | less developed
 infrastructure;                                                            
| |   |                                                                                            
| |  | difficulties in recruiting
 and retaining personnel, and managing international operations;
| |   |                                                                                            
| |  | fluctuations in foreign
 currency exchange rates;                                          
| |   |                                                                                            
| |  | lack of sufficient
 protection for intellectual property rights; and                       
| |   |                                                                                            
| |  | potentially adverse tax
 consequences.                                                     

Until recently, we had no
operations outside of North America, and we have limited experience
establishing or operating businesses outside of North America. If we do not
adequately anticipate and respond to the risks inherent in international
operations, our operating results and the market price of our common stock
could be materially and adversely affected. In addition, although we intend to
expand our business outside of North America, there are risks associated with
conducting an international operation, including the risks listed above, and
such expansion may not be successful or have a positive effect on, and could
materially and adversely affect, our financial condition and results of
operations.

We cannot assure you that we will be able to successfully
integrate any businesses, products, technologies or personnel that we have
acquired or might acquire in the future.

We may, from time to time,
continue to consider investments in or acquisitions of complementary companies,
products or technologies. In the event of any future acquisitions, we could:

| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | issue stock that would
 dilute our current stockholders percentage ownership;
| |   |                                                                               
| |  | incur debt;                                                                   
| |   |                                                                               
| |  | assume liabilities;                                                           
| |   |                                                                               
| |  | incur expenses related to
 the impairment of goodwill; or                     
| |   |                                                                               
| |  | incur large and immediate
 write-offs.                                        

We may not be able to
identify suitable acquisition candidates, and if we do identify suitable
candidates, we may not be able to make these acquisitions on acceptable terms,
or at all.

22

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Our operation of any
acquired business will also involve numerous risks, including:

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | problems integrating the
 acquired operations, personnel, technologies or products;         
| |   |                                                                                             
| |  | unanticipated costs;                                                                        
| |   |                                                                                             
| |  | diversion of managements
 time and attention from our core businesses;                     
| |   |                                                                                             
| |  | adverse effects on
 existing business relationships with suppliers and customers;           
| |   |                                                                                             
| |  | risks associated with
 entering markets in which we have no or limited prior experience; and
| |   |                                                                                             
| |  | potential loss of key
 employees, particularly those of acquired companies.                 

Since our inception, we have
not made any acquisitions other than the PowerKey acquisition during 2008, the
Didbox Ltd. acquisition during 2009, and the acquisition of the Asset
Intelligence business during 2010, and we cannot assure you that we will be
able to successfully integrate any businesses, products, technologies or
personnel that we have acquired or that we might acquire in the future. Any
failure to do so could have a material adverse effect on our financial
condition and results of operations. Acquisitions also involve the risk of
potential unknown liabilities associated with the acquired business. As a
result of these risks, we may not be able to achieve the expected benefits of
any acquisition, including the Asset Intelligence acquisition. The successful
integration of Asset Intelligence will require, among other things, integration
of Asset Intelligences operations, products, policies and personnel with our
business. We may not achieve successful integration in a timely manner, or at
all, and we may not realize the anticipated benefits and synergies of the
acquisition to the extent, or in the timeframe, anticipated.

In addition, if we make
changes to our business strategy or if external conditions adversely affect our
business operations, we may be required to record an impairment charge for goodwill
or intangibles, which would lead to decreased assets and reduced net operating
performance.

The concentration of common stock ownership among our
executive officers and directors could limit the ability of other stockholders
of the Company to influence the outcome of corporate transactions or other
matters submitted for stockholder approval.

As of March 28, 2011, our
executive officers and directors beneficially owned, in the aggregate, 13% of
our outstanding common stock, not including 1,789,000 shares of common stock
    that our executive officers and directors may acquire upon the exercise of
    outstanding options or if they otherwise acquire additional shares of common
    stock in the future. As a result, our officers and directors may have the
    ability to influence the outcome of all corporate actions requiring stockholder
    approval, irrespective of how our other stockholders may vote, including
    the following actions:

| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | the election of directors;                                                                                                          
| |   |                                                                                                                                     
| |  | adoption of stock option
 or other equity incentive compensation plans;                                                             
| |   |                                                                                                                                     
| |  | the amendment of our
 organizational documents; and                                                                                 
| |   |                                                                                                                                     
| |  | the approval of certain
 mergers and other significant corporate transactions, including a sale of
 substantially all of our assets.

23

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The unpredictability of our quarterly operating results could
adversely affect the market price of our common stock.

Our revenues and operating
results may vary significantly from quarter to quarter due to a number of
factors, many of which are outside of our control and any of which could
adversely affect the market price of our common stock. The main factors that
may affect us include the following:

| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | variations in the sales of
 our products to our significant customers;                                                   
| |   |                                                                                                                          
| |  | variations in the mix of
 products and services provided by us;                                                          
| |   |                                                                                                                          
| |  | the timing and completion
 of initial programs and larger or enterprise-wide purchases of our products
 by our customers;
| |   |                                                                                                                          
| |  | the length and variability
 of the sales cycle for our products;                                                         
| |   |                                                                                                                          
| |  | the timing and size of
 sales;                                                                                           
| |   |                                                                                                                          
| |  | changes in market and
 economic conditions, including fluctuations in demand for our products; and                       
| |   |                                                                                                                          
| |  | announcements of new
 products by our competitors.                                                                       

As a result of these and
other factors, revenues for any quarter are subject to significant variation
that could adversely affect the market price for our common stock.

Future sales of our common stock, including sales of our
common stock acquired upon the exercise of outstanding options, may cause the
market price of our common stock to decline.

The market price of our
common stock could decline as a result of sales by our existing stockholders of
shares of common stock in the market, or sales of our common stock acquired
upon the exercise of outstanding options, or the perception that these sales
could occur. These sales also may make it more difficult for us to sell equity
securities at a time and price that we deem appropriate.

We have 11,171,000 shares of common
stock outstanding as of March 28, 2011, of which 9,681,000 shares are freely
transferable without restriction, and 1,490,000 shares are held by our officers and
directors and, as such, are subject to the applicable volume, manner of sale,
holding period and other limitations of Rule 144 under the Securities Act. In
addition, as of December 31, 2010, options to purchase 2,666,000 shares of our
common stock were issued and outstanding, of which 1,522,000 were vested. The
remaining options will vest ratably over a five-year period measured from the
date of grant. The weighted-average exercise price of the vested stock options
is $9.60. We also may issue additional shares of stock in connection with our
business, including in connection with acquisitions, and may grant additional
stock options to our employees, officers, directors and consultants under our
stock option plans or warrants to third parties. If a significant portion of
these shares of common stock were sold in the public market, the market value
of our common stock could be adversely affected.

Interest rate fluctuations may adversely affect our income and
results of operations.

As of December 31, 2010, we
had cash, cash equivalents and investments of $28.4 million. In a declining
interest rate environment, reinvestment typically occurs at less favorable
market rates, negatively impacting future investment income. Accordingly,
interest rate fluctuations may adversely affect our income and results of
operations.

24

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Our cash and cash equivalents could be adversely affected by
the current downturn in the financial and credit markets.

We maintain our cash and
cash equivalents with major financial institutions; however, our cash and cash
equivalent balances with these institutions exceed the Federal Deposit
Insurance Corporation insurance limits. While we monitor on a systematic basis
the cash and cash equivalent balances in the operating accounts and adjust the
balances as appropriate, these balances could be impacted if one or more of the
financial institutions with which we deposit our cash and cash equivalents
fails or is subject to other adverse conditions in the financial or credit
markets. To date, we have experienced no loss of principal or lack of access to
our invested cash or cash equivalents; however, we can provide no assurance
that access to our invested cash and cash equivalents will not be affected if
the financial institutions in which we hold our cash and cash equivalents fail
or the financial and credit markets continue to deteriorate.

Goodwill impairment or intangible impairment charges may
affect our results of operations in the future.

We test goodwill for
impairment on an annual basis and more often if events occur or circumstances
change that would likely reduce the fair value of a reporting unit to an amount
below its carrying value. We also test for other possible acquisition intangible
impairments if events occur or circumstances change that would indicate that
the carrying amount of such intangible may not be recoverable. Any resulting
impairment loss would be a non-cash charge and may have a material adverse
impact on our results of operations in any future period in which we record a
charge.

Long-lived assets with
determinable useful lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Such charges could have a material adverse effect on our
results of operations in the period in which they are recorded.

Declines in general economic conditions could result in
decreased demand for our products and services, which would adversely affect
our business, financial condition and results of operations.

Our results of operations
are affected by the levels of business activities of our customers, which can
be affected by economic conditions in the United States and globally. During
periods of economic downturns, our customers may decrease their demand for
wireless technology solutions, as well as the maintenance, support and
consulting services we provide. This slowdown may have an adverse effect on the
wireless solutions industry in general and on demand for our products and
services, but the magnitude of that impact is uncertain. Our future growth is
dependent, in part, upon the demand for our products and services. Prolonged
weakness in the economy may cause business enterprises to delay or cancel
wireless solutions projects, reduce their overall wireless solutions budgets
and/or reduce or cancel orders for our services. This, in turn, may lead to
longer sales cycles, delays in purchase decisions, and payment and collection
issues, and may also result in price pressures, causing us to realize lower
revenues and operating margins. Additionally, if our customers cancel or delay
their wireless solutions initiatives, our business, financial condition and
results of operations could be materially and adversely affected.

25

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Provisions of Delaware law, our charter documents or our
shareholder rights plan could delay or prevent an acquisition of the Company,
even if the acquisition would be beneficial to our stockholders, and could make
it more difficult for our stockholders to change the Companys management.

Section 203 of the Delaware
General Corporation Law prohibits us from engaging in a business combination
with any of our interested stockholders for three years after such stockholder
became an interested stockholder unless certain specified conditions are met.
As a result, these provisions and Delaware law could limit the price that
investors are willing to pay in the future for shares of our common stock.

In addition, provisions of
our certificate of incorporation and bylaws may discourage, delay or prevent a
merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which stockholders might otherwise receive
a premium for their shares. This is because these provisions may prevent or
frustrate attempts by stockholders to replace or remove our current management
or members of our Board of Directors. These provisions, among other things:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | permit our Board of
 Directors to issue, without further action by our stockholders, up to
 5,000,000 shares of preferred stock, with any rights, preferences and
 privileges as they may designate, including the right to approve an
 acquisition or other change in control;                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | provide that special
 meetings of stockholders may be called only by (i) our Board of Directors
 pursuant to a resolution adopted by a majority of the entire Board of
 Directors, either upon motion of a director or upon written request by the
 holders of at least 50% of the voting power of all the shares of our capital
 stock entitled to vote in the election of directors, voting as a single
 class, or (ii) our Chairman of the Board or our President; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | require the affirmative
 vote of at least 75% of the voting power of all the shares of our capital
 stock entitled to vote in the election of directors, voting as a single
 class, to amend or repeal the provisions outlined above dealing with meetings
 of stockholders.                                                                                                                                                                                             

Also, in July 2009, we
entered into a Rights Agreement, dated as of July 1, 2009 (the Rights
Agreement), under which the Board of Directors authorized and declared a
dividend of one preferred stock purchase right (a Right and, collectively,
the Rights) for each share of the Companys common stock outstanding as of
July 13, 2009. Each Right entitles the registered holder to purchase from the
Company one one-thousandth (subject to adjustment) of a share of Series A
Junior Participating Preferred Stock at a price of $19.47, subject to
adjustment. The Rights become exercisable upon the occurrence of certain events
and may make the acquisition of the Company more difficult and expensive. The
Rights Agreement may delay or prevent an acquisition of the Company that
stockholders may consider favorable, which could decrease the value of our
common stock. The Rights will expire upon the earliest to occur of: (i) the
close of business on the Sunset Date (as defined in the Rights Agreement);
(ii) the time at which the Rights are redeemed as provided in the Rights
Agreement; or (iii) the time at which such Rights are exchanged as provided in
the Rights Agreement.

26

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Item 1B. Unresolved Staff Comments

None.

Item 2.
Properties

Our executive
and I.D. Systems administrative offices are located in Woodcliff Lake, New
Jersey. In May 2010, we entered into a lease for this facility, covering
approximately 21,400 square feet, that expires on February 28, 2021. The rent
is currently $35,063 per month.

As a result of
the Asset Intelligence acquisition on January 7, 2010, we assumed the sublease,
covering approximately 14,981 square feet, for the Asset Intelligence
administrative offices located in Plano, Texas, which expires on January 18,
2012. The rent expense per month for this sublease is $16,229.

We believe
that our existing facilities are adequate for our existing needs.

Item 3. Legal
Proceedings

In the ordinary course of its business, the Company is at times
    subject to various legal proceedings. As of March 30, 2011, the Company
    was not a party to any material legal proceedings.

Item 4. (Removed and Reserved)

27

---



PART II.

Item 5. Market
for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

Market Information.

Our common
stock is quoted on the NASDAQ Global Market under the symbol IDSY. The
following table sets forth the high and low sales price for our common stock as
reported on such quotation system for each fiscal quarter during the years
ended December 31, 2010 and 2009.

|                    |  |      |      |     |   |      | 
|------------------- |  | ---- | ---- | --- | - | ---- | 
|Quarter Ended       |  | High |      | Low |  
|                    |  |      |      |     |  
|2010                |  |      |      |     |   |      | 
|March 31,
 2010     |  | $    | 3.88 |     | $ | 2.75 | 
|June 30,
 2010      |  |      | 3.89 |     |   | 2.60 | 
|September
 30, 2010 |  |      | 2.85 |     |   | 1.77 | 
|December 31,
 2010  |  |      | 3.49 |     |   | 1.93 | 
|                    |  |      |      |     |   |      | 
|2009                |  |      |      |     |   |      | 
|March 31,
 2009     |  | $    | 4.20 |     | $ | 3.11 | 
|June 30,
 2009      |  |      | 4.14 |     |   | 3.23 | 
|September
 30, 2009 |  |      | 4.20 |     |   | 3.11 | 
|December 31,
 2009  |  |      | 4.17 |     |   | 2.98 | 

Performance Graph.

The following
graph shows a five-year comparison of cumulative total shareholder return for
(i) the Company, (ii) the NASDAQ Market Index, and (iii) the Morningstar
Communication Equipment Index (the Morningstar Index).

The graph
assumes that $100 was invested in each of the Companys common stock, the
NASDAQ Market Index and the Morningstar Index on December 31, 2005, and that any dividends were reinvested. Data points
on the graph are annual. Note that historic stock price performance is not
necessarily indicative of future stock price performance. The following graph and related information shall not be deemed soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

28

---



COMPARISON OF CUMULATIVE TOTAL RETURN

(LINE GRAPH)

ASSUMES $100 INVESTED ON JAN. 01, 2006
ASSUMES DIVIDENDS (IF ANY) REINVESTED
FISCAL YEAR ENDED DEC. 31, 2010

|                              |  |                   |        |            |  |            |  |            |        |            |  |            |  |  |        |  |  |        | 
|----------------------------- |  | ----------------- | ------ | ---------- |  | ---------- |  | ---------- | ------ | ---------- |  | ---------- |  |  | ------ |  |  | ------ | 
|                              |  | Fiscal Year Ended |       
|                              |  |                   |       
|COMPANY/INDEX/MARKET          |  | 12/31/2005        |        | 12/31/2006 |  | 12/31/2007 |  | 12/31/2008 |        | 12/31/2009 |  | 12/31/2010 | 
|                              |  |                   |        |            |  |            |  |            |        |            |  |            | 
|I.D. Systems, Inc.            |  |                   | 100.00 |            |  | 78.91      |  |            | 52.24  |            |  | 16.98      |  |  | 13.46  |  |  | 14.00  | 
|NASDAQ Market Index           |  |                   | 100.00 |            |  | 110.26     |  |            | 121.89 |            |  | 73.10      |  |  | 106.23 |  |  | 125.37 | 
|Morningstar Industry Index(1) |  |                   | 100.00 |            |  | 117.34     |  |            | 131.12 |            |  | 68.22      |  |  | 93.44  |  |  | 93.56  | 

|___________ |                                                                                                                                                                                                                                                                           
|----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)         | Morningstar, Inc. reconstituted
        the Morningstar Communication Equipment Index in the second half of 2010.
        As a result of such reconstitution, historical returns have been recalculated
        to reflect the updated composition of that industry index.



Source: Morningstar, Inc.

29

---



Holders.

As of March
22, 2011, there were 27 holders of record of our common stock.

Dividends.

We have never
paid a cash dividend on our common stock and do not expect to pay a cash
dividend in the near future. We currently intend to retain future earnings, if
any, to finance our operations and expand our business. Any future
determination to pay cash dividends will be at the discretion of our Board of
Directors and will depend upon our financial condition, operating results,
capital requirements and any other factors our Board of Directors deems
relevant.

Sales of Unregistered Securities.

None.

Purchases of Equity Securities by the Issuer.

On November 4,
2010, the Company announced that its Board of Directors authorized the
repurchase of issued and outstanding shares of the Companys common stock
having an aggregate value of up to $3,000,000 pursuant to a share repurchase
program. The repurchases under the share repurchase program will be made from
time to time in the open market or in privately negotiated transactions and
will be funded from the Companys working capital. The amount and timing of
such repurchases will be dependent upon the price and availability of shares,
general market conditions and the availability of cash, as determined at the
discretion of the Companys management. All shares of common stock repurchased
under the Companys share repurchase program are held as treasury stock. The
share repurchase program does not have an expiration date, and the Company may
discontinue or suspend the share repurchase program at any time.

The following
table describes the Companys share repurchase activity for each month of the
quarterly period ended December 31, 2010. All of the repurchases set forth in
the table were made under the share repurchase program in open market
transactions.

ISSUER
PURCHASES OF EQUITY SECURITIES

|                                     |  |                                   |  |                               |      |                                                                                     |        |                                                                                             |   |          
|------------------------------------ |  | --------------------------------- |  | ----------------------------- | ---- | ----------------------------------------------------------------------------------- | ------ | ------------------------------------------------------------------------------------------- | - | ---------
|Period                               |  | Total Number of
 Shares Purchased |  | Average Price
 Paid per Share |      | Total Number of Shares
 Purchased as Part of
 Publicly Announced
 Plans or Programs |        | Approximate Dollar Value of
 Shares that May Yet Be
 Purchased Under the Plans or
 Programs
|                                     |  |                                   |  |                               |      |                                                                                     |        |                                                                                            
|October 1, 2010 − October 31, 2010   |  |                                  |  |                               |     |                                                                                     |       |                                                                                             | $ | 3,000,000
|November 1, 2010 − November 30, 2010 |  | 26,000                            |  | $                             | 2.72 |                                                                                     | 26,000 |                                                                                             |   | 2,930,000
|December 1, 2010 − December 31, 2010 |  | 10,000                            |  | $                             | 2.67 |                                                                                     | 10,000 |                                                                                             |   | 2,901,000
|                                     |  |                                   |  |                               |      |                                                                                     |        |                                                                                             |   |          
|Total                                |  | 36,000                            |  | $                             | 2.71 |                                                                                     | 36,000 |                                                                                             | $ | 2,901,000
|                                     |  |                                   |  |                               |      |                                                                                     |        |                                                                                             |   |          

In addition, on May 3, 2007, the Company previously had announced that its Board
of Directors had authorized the repurchase of issued and outstanding shares of our common stock
having an aggregate value of up to $10,000,000 pursuant to a share repurchase program
(the 2007 Repurchase Program). The Company did not purchase any shares of its common
stock under the 2007 Repurchase Program during the years ended December 31, 2009 or 2010.
As of December 31, 2010, the Company had purchased approximately 1,075,000 shares of
its common stock in open market transactions under the 2007 Repurchase Program for an aggregate
purchase price of approximately $9,970,000. The repurchases were funded from the Companys
working capital, and the amount and timing of such repurchases depended upon the price
and availability of shares, general market conditions and the availability of cash,
as determined at the discretion of our management.  The 2007 Repurchase Program does
not have an expiration date, and the Company may discontinue or suspend the 2007
Repurchase Program at any time.  All shares of common stock repurchased under the
2007 Repurchase Program are held as treasury stock.

Securities Authorized for Issuance Under Equity Compensation Plans.

The following
table provides certain information with respect to the Companys equity
compensation plans in effect as of December 31, 2010:

EQUITY
COMPENSATION PLAN INFORMATION

|                                                           |  |                                                                                                      |  |                                                                                     |   |                                                                                                                         |  |  |         | 
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|Plan
 category                                             |  | Number of
 Securities to be
 issued upon exercise of
 outstanding options, warrants
 and rights
 (a) |  | Weighted-average
 exercise price
 of outstanding options, warrants
 and rights
 (b) |   | Number of
 securities remaining
 available for future issuance
 (excluding securities reflected
 under column (a))
 (c)
|                                                           |  |                                                                                                      |  |                                                                                     |   |                                                                                                                         |  | 
|                                                           |  |                                                                                                      |  |                                                                                     |   |                                                                                                                         |  |  |        
|Equity compensation plans approved by security holders (1) |  | 2,666,000                                                                                            |  |                                                                                     | $ | 7.34                                                                                                                    |  |  | 274,000 | 
|Equity compensation plans not approved by security holders |  |                                                                                                     |  |                                                                                     |   |                                                                                                                        |  |  |        | 
|                                                           |  |                                                                                                      |  |                                                                                     |   |                                                                                                                         |  |  |         | 
|Total                                                      |  | 2,666,000                                                                                            |  |                                                                                     | $ | 7.34                                                                                                                    |  |  | 274,000 | 
|                                                           |  |                                                                                                      |  |                                                                                     |   |                                                                                                                         |  |  |         | 

(1) These
plans consist of the Companys 1999 Stock Option Plan, 1999 Director Option
Plan, 2007 Equity Compensation Plan and 2009 Non-Employee Director Equity
Compensation Plan, which were our only equity compensation plans in existence
as of December 31, 2010. Each of our 1999 Stock Option Plan and 1999 Director Option
Plan has terminated, and no additional awards were, or may be, granted
thereunder.

30

---



|                                | 
|------------------------------- | 
|Item 6. Selected Financial Data

The following
table sets forth selected financial data for each of the five years ended
December 31, 2010 derived from our audited financial statements. You should
read the information in the table below together with the section of this
Annual Report on Form 10-K entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations, which discusses the 2008, 2009
and 2010 fiscal years, and our financial statements and related notes and the
other financial data included elsewhere in this Annual Report on Form 10-K.

|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|----------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ----------- | - | ---- | ---------- | ---- | - | ----------- | - | - | ----------- | -
|                                                      |  | Year Ended December 31, |           
|                                                      |  |                         |           
|                                                      |  | 2006                    |            | 2007 |   | 2008        |   | 2009 |            | 2010 |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |  
|Statement of Operations Data:                         |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Revenues                                              |  | $                       | 24,740,000 |      | $ | 17,083,000  |   | $    | 27,046,000 |      | $ | 10,316,000  |   | $ | 25,861,000  |  
|Cost of revenues                                      |  |                         | 13,701,000 |      |   | 8,929,000   |   |      | 13,466,000 |      |   | 5,554,000   |   |   | 11,440,000  |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Gross profit                                          |  |                         | 11,039,000 |      |   | 8,154,000   |   |      | 13,580,000 |      |   | 4,762,000   |   |   | 14,421,000  |  
|Operating expenses:                                   |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Selling, general and administrative
 expenses         |  |                         | 12,943,000 |      |   | 15,963,000  |   |      | 16,760,000 |      |   | 16,543,000  |   |   | 23,326,000  |  
|Research and development expenses                     |  |                         | 2,639,000  |      |   | 2,849,000   |   |      | 2,883,000  |      |   | 2,604,000   |   |   | 4,429,000   |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Income (loss) from operations                         |  |                         | (4,543,000 | )    |   | (10,658,000 | ) |      | (6,063,000 | )    |   | (14,385,000 | ) |   | (13,334,000 | )
|Interest income                                       |  |                         | 2,801,000  |      |   | 3,238,000   |   |      | 2,226,000  |      |   | 933,000     |   |   | 675,000     |  
|Interest expense                                      |  |                         | (29,000    | )    |   | (10,000     | ) |      |           |      |   | (130,000    | ) |   | (56,000     | )
|Other income (loss)                                   |  |                         | 155,000    |      |   | 89,000      |   |      | 338,000    |      |   | 390,000     |   |   | 104,000     |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Net income (loss)                                     |  | $                       | (1,616,000 | )    | $ | (7,341,000  | ) | $    | (4,175,000 | )    | $ | (13,192,000 | ) | $ | (12,611,000 | )
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Net income (loss) per share - basic                   |  | $                       | (0.15      | )    | $ | (0.66       | ) | $    | (0.38      | )    | $ | (1.20       | ) | $ | (1.12       | )
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Net income (loss) per share - diluted                 |  | $                       | (0.15      | )    | $ | (0.66       | ) | $    | (0.38      | )    | $ | (1.20       | ) | $ | (1.12       | )
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Weighted average common shares outstanding
 - basic   |  |                         | 10,501,000 |      |   | 11,205,000  |   |      | 10,887,000 |      |   | 10,991,000  |   |   | 11,239,000  |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Weighted average common shares outstanding
 - diluted |  |                         | 10,501,000 |      |   | 11,205,000  |   |      | 10,887,000 |      |   | 10,991,000  |   |   | 11,239,000  |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Balance Sheet Data (at end of period):                |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Cash and cash equivalents                             |  | $                       | 9,644,000  |      | $ | 5,103,000   |   | $    | 12,558,000 |      | $ | 19,481,000  |   | $ | 14,491,000  |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Investments                                           |  |                         | 60,716,000 |      |   | 59,900,000  |   |      | 43,461,000 |      |   | 40,661,000  |   |   | 13,929,000  |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Total assets                                          |  |                         | 84,905,000 |      |   | 74,796,000  |   |      | 69,948,000 |      |   | 70,575,000  |   |   | 60,885,000  |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Long-term debt                                        |  |                         | 240,000    |      |   | 19,000      |   |      |           |      |   |            |   |   |            |  
|                                                      |  |                         |            |      |   |             |   |      |            |      |   |             |   |   |             |  
|Total stockholders equity                            |  |                         | 81,284,000 |      |   | 71,670,000  |   |      | 67,085,000 |      |   | 55,881,000  |   |   | 44,745,000  |  

31

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|                                                                                               | 
|---------------------------------------------------------------------------------------------- | 
|Item 7. Managements Discussion and Analysis of Financial Condition and
 Results of Operations

The following discussion is intended to
assist you in understanding our financial condition and results of operations
and should be read in conjunction with the financial statements and related
notes included elsewhere in this Annual Report on Form 10-K. Many of the
amounts and percentages in this section have been rounded for convenience of
presentation, but actual recorded amounts have been used in computations.
Accordingly, some information may appear not to compute accurately.

Overview

I.D. Systems,
Inc. (together with its subsidiaries, I.D. Systems, the Company, we,
our, or us) develops, markets and sells wireless solutions
for managing and securing high-value enterprise assets. These assets include
industrial vehicles, such as forklifts, airport ground support equipment and
rental vehicles, and transportation assets, such as dry van trailers, refrigerated
trailers, railcars and containers. Our patented wireless asset management
systems, utilize radio frequency identification (RFID),Wi-Fi, satellite or cellular
communications, and sensor technology to address the needs of organizations to
control, track, monitor and analyze their assets. Our solutions enable our
customers to achieve tangible economic benefits by making timely, informed
decisions that increase the security, productivity and efficiency of their
operations. As used herein, references to IDS refer to our IDS operating
segment, which consists of the our historical core wireless asset management
systems operations, and references to AI refer to our AI operating
segment, which consists of our data-driven telematics solutions business for
transportation asset management conducted by Asset Intelligence, LLC.

We have
focused our business activities on three primary applications: (i) industrial
fleet management, (ii) transportation asset management, and (iii) rental fleet
management. Our solution for industrial fleet management allows our customers
to reduce operating costs and capital expenditures and to comply with certain
safety regulations by accurately and reliably measuring and controlling fleet
activity. This solution also enhances security at industrial facilities and
areas of critical infrastructure, such as airports, by controlling access to,
and restricting the use of, vehicles and equipment. Our solution for
transportation asset management allows our customers to increase revenue per
asset deployed, reduce fleet size, and improve the monitoring and control of
sensitive cargo. Our solution for rental fleet management allows rental car
companies to generate higher revenue by more accurately tracking vehicle data,
such as fuel consumption and odometer readings, and improve customer service by
expediting the rental and return processes. In addition, our wireless solution
for carsharing enables rental car companies to establish a network of
vehicles positioned strategically around cities for use by their members,
control vehicles remotely, manage member reservations by phone or Internet, and
charge members for vehicle use by the hour.

We sell our
system to both executive and division-level management. Typically, our initial
system deployment serves as a basis for potential expansion across the
customers organization. We work closely with customers to help maximize the
utilization and benefits of our system and demonstrate the value of
enterprise-wide deployments. Post-implementation, we consult with our customers
to further extend and customize the benefits to the enterprise by delivering
enhanced analytics capabilities.

We market and
sell our solutions to a wide range of customers in the commercial and
government sectors. Our customers operate in diverse markets, such as
automotive manufacturing, heavy industry, retail and wholesale distribution,
transportation, aerospace and defense, homeland security and vehicle rental.

We have
incurred net losses of approximately $4.2 million, $13.2 million and $12.6
million for the years ended December 31, 2008, 2009 and 2010, respectively, and
have incurred additional net losses since inception. At December 31, 2010, we
had an accumulated deficit of approximately $49.5 million.

During the
year ended December 31, 2010, we generated revenues of $25.9 million and the
Wal-Mart Stores, Inc. accounted for 26% of our revenues. During the year ended
December 31, 2009, we generated revenues of $10.3 million and the U.S. Postal
Service, Wal-Mart Stores, Inc., NACCO Materials Handling Group, Inc. and Ford
Motor Company accounted for 20%, 15%, 15%, and 14% of our revenues, respectively.
During the year ended December 31, 2008, we generated revenues of $27.0
million, and the U.S. Postal Service and Wal-Mart Stores, Inc. accounted for
42% and 41% of our revenues, respectively.

32

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We are highly
dependent upon sales of our system to a few customers. The loss of any of these
key customers, or any material reduction in the amount of our products they
purchase during a particular period, could materially and adversely affect our
revenues for such period. Conversely, a material increase in the amount of our
products purchased by a key customer (or customers) during a particular period
could result in a significant increase in our revenues for such period, and
such increased revenues may not recur in subsequent periods. Some of these key
customers, as well as other customers of the Company, operate in markets that
have suffered business downturns in the past few years or may so suffer in the
future, particularly in light of the current global economic downturn, and any
material adverse change in the financial condition of such customers could
materially and adversely affect our financial condition and results of
operations. If we are unable to replace such revenue from existing or new
customers, the market price of our common stock could decline significantly.

We expect that
many customers who utilize our solutions will do so as part of a large-scale
deployment of these solutions across multiple or all divisions of their
organizations. A customers decision to deploy our solutions throughout its
organization will involve a significant commitment of its resources.
Accordingly, initial implementations may precede any decision to deploy our
solutions enterprise-wide. Throughout this sales cycle, we may spend
considerable time and expense educating and providing information to
prospective customers about the benefits of our solutions.

The timing of
the deployment of our solutions may vary widely and will depend on the specific
deployment plan of each customer, the complexity of the customers organization
and the difficulty of such deployment. Customers with substantial or complex
organizations may deploy our solutions in large increments on a periodic basis.
Accordingly, we may receive purchase orders for significant dollar amounts on
an irregular and unpredictable basis. Because of our limited operating history
and the nature of our business, we cannot predict the timing or size of these
sales and deployment cycles. Long sales cycles, as well as our expectation that
customers will tend to place large orders sporadically with short lead times,
may cause our revenues and results of operations to vary significantly and
unexpectedly from quarter to quarter.

Our ability to
increase our revenues and generate net income will depend on a number of
factors, including our ability to:

| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | increase
 sales of products and services to our existing customers;                     
| |   |                                                                                         
| |  | convert our
 initial programs into larger or enterprise-wide purchases by our customers;
| |   |                                                                                         
| |  | increase
 market acceptance and penetration of our products; and                        
| |   |                                                                                         
| |  | develop and
 commercialize new products and technologies.                               

Critical Accounting Policies And Estimates

We have
adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States in the preparation of our
financial statements. Our significant accounting policies are described in Note
2 to our consolidated financial statements included in this Annual Report on
Form 10-K. Certain accounting policies involve significant judgments and assumptions
by our management that can have a material impact on the carrying value of
certain assets and liabilities. We consider such accounting policies to be our
critical accounting policies. The judgments and assumptions used by our
management in these critical accounting policies are based on historical
experience and other factors that our management believes to be reasonable
under the circumstances. Because of the nature of these judgments and
assumptions, actual results could differ significantly from these judgments and
estimates, which could have a material impact on the carrying values of our
assets and liabilities and our results of operations. Our critical accounting
policies are described below.

33

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Revenue Recognition

We derive
revenue from: (i) sales of our industrial fleet and rental fleet wireless asset
management systems and services, which includes training and technical support;
(ii) sale of our remote asset wireless asset management systems and spare parts
sold to customers (for which title transfers on date of customer receipt) and
from the related communication services under contracts that generally provide
    for service over periods ranging from one to five years; (iii) from post-contract
maintenance and support agreements; and (iv) periodically, from leasing
arrangements.

Our industrial
and rental fleet wireless asset management systems consist of on-asset
hardware, communication infrastructure and software. Revenue derived from the
sale of our industrial and rental fleet wireless asset management systems is
allocated to each element based upon vendor specific objective evidence (VSOE)
of the fair value of the element. VSOE of the fair value is based upon the
price charged when the element is sold separately. Revenue is recognized as
each element is earned based on the selling price of each element, and when
there are no undelivered elements that are essential to the functionality of
the delivered elements. The Companys system is typically implemented by the
customer or a third party and, as a result, revenue is recognized when title
and risk of loss passes to the customer, which usually is upon delivery of the
system, persuasive evidence of an arrangement exists, sales price is fixed and
determinable, collectability is reasonably assured and contractual obligations
have been satisfied. In some instances, we are also responsible for providing
installation services. The additional installation services, which could be
performed by third parties, are considered another element in a multi-element
deliverable and revenue for installation services is recognized at the time the
installation is provided. Training and technical support revenue are recognized
at time of performance.

We recognize
revenues from the sale of remote asset wireless asset management systems and
spare parts when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable, and collectability is reasonably
assured. These criteria include requirements that the delivery of future
products or services under the arrangement is not required for the delivered
items to serve their intended purpose. We have determined that the revenue
derived from the sale of remote asset wireless management systems does not have
stand alone value to the customer separate from the communication services
provided and therefore the arrangements constitute a single unit of accounting.
Under these provisions, all of the Companys billings for equipment and the
related cost are deferred, recorded, and classified as a current and long-term
liability and a current and long-term asset, respectively. Deferred revenue and
cost are recognized over the service contract life, beginning at the time that
a customer acknowledges acceptance of the equipment and service. The customer
service contracts typically range from one to five years.

The service revenue
for our remote asset monitoring equipment relates to charges for monthly
messaging usage and value-added features charges. The usage fee is a monthly
fixed charge based on the expected utilization according to the rate plan
chosen by the customer. Service revenue generally commences upon equipment
installation and customer acceptance, and is recognized over the period such
services are provided.

Spare parts sales are reflected in product revenues and recognized
    on the date of customer receipt of the part. Revenue from remote asset monitoring
    equipment activation fees are deferred and amortized over the life of the
contract.

We also
derive revenue under leasing arrangements of remote asset monitoring
equipment. Such arrangements provide for monthly payments covering the system
sale, maintenance, support and interest. These arrangements meet the criteria
to be accounted for as sales-type leases. Accordingly, an asset is established
for the sales-type lease receivable and revenue is deferred and recognized
over the service contract as described above. Maintenance revenues and interest
income are recognized monthly over the lease term.

We also enter
into post-contract maintenance and support agreements for our wireless asset
management systems. Revenue is recognized over the service period and the cost
of providing these services is expensed as incurred.

Stock-Based
Compensation

We account for
stock-based employee compensation for all share-based payments, including
grants of stock options, as an operating expense, based on their fair values on
the grant date. The Company recorded stock-based compensation expense of
$2,989,000, $2,157,000 and $1,558,000 for the years ended December 31, 2008,
2009 and 2010, respectively.

We estimate
the fair value of share-based payment awards on the grant date using an option
pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service period in
our consolidated statement of operations. We estimate forfeitures at the time
of grant in order to estimate the amount of share-based awards that will
ultimately vest. The estimate is based on our historical rates of forfeitures.
Estimated forfeitures are revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.

Long-lived Assets

Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to the future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets and
would be charged to earnings.

Goodwill and Other
Intangible Assets

Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses. Goodwill and intangible assets deemed to have
indefinite lives are not amortized. Intangible assets are amortized over their
estimated useful lives unless the lives are determined to be indefinite.
Intangible assets are carried at cost, less accumulated amortization and impairment
    charges. Intangible assets consist of trademarks and trade names, patents,
    customer relationships and other intangible assets. We test goodwill and
    other intangible assets annually, or when a triggering event occurs between
    annual impairment tests, to determine if impairment exists and if the use
    of indefinite lives is currently applicable.

Product Warranties

The AI segment
provides a one-year warranty on its products. Estimated future warranty costs
are accrued in the period that the related revenue is recognized. These
estimates are derived from historical data and trends of product reliability
and costs of repairing and replacing defective products.

34

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Income
taxes

We use the
asset and liability method of accounting for deferred income taxes. Deferred
income taxes are measured by applying enacted statutory rates to net operating
loss carryforwards and to the differences between the financial reporting and
tax bases of assets and liabilities. Deferred tax assets are reduced, if
necessary, by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.

Fair Value Measurements

In determining
fair value of financial instruments, we utilize a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those levels:

| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | Level 1:
 Unadjusted quoted prices in active markets for identical assets or
 liabilities.                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                             
| | § | Level 2:
 Inputs other than quoted prices that are observable for the asset or
 liability, either directly or indirectly. These include quoted prices for
 similar assets or liabilities in active markets and quoted prices for
 identical or similar assets or liabilities in markets that are not active.
| |   |                                                                                                                                                                                                                                                                                                             
| | § | Level 3:
 Unobservable inputs that reflect the reporting entitys own assumptions.                                                                                                                                                                                                                          

Results of Operations

The following
table sets forth certain items related to our statement of operations as a
percentage of revenues for the periods indicated and should be read in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this Annual Report on Form 10-K. A detailed discussion of
the material changes in our operating results is set forth below.

|                                              |  |                         |       |      |  |        |    |  |       |   
|--------------------------------------------- |  | ----------------------- | ----- | ---- |  | ------ | -- |  | ----- | --
|                                              |  | Year Ended December 31, |      
|                                              |  |                         |      
|                                              |  | 2008                    |       | 2009 |  | 2010   |   
|                                              |  |                         |       |      |  |        |   
|Revenues:                                     |  |                         |       |      |  |        |    |  |       |   
|Products                                      |  |                         | 74.2  | %    |  | 62.7   | %  |  | 36.7  | % 
|Services                                      |  |                         | 25.8  |      |  | 37.3   |    |  | 63.3  |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|                                              |  |                         | 100.0 |      |  | 100.0  |    |  | 100.0 |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|Cost of revenues:                             |  |                         |       |      |  |        |    |  |       |   
|Cost of products                              |  |                         | 37.0  |      |  | 37.6   |    |  | 19.6  |   
|Cost of services                              |  |                         | 12.8  |      |  | 16.2   |    |  | 24.6  |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|Total gross profit                            |  |                         | 50.2  |      |  | 46.2   |    |  | 55.8  |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|Selling, general and administrative
 expenses |  |                         | 62.0  |      |  | 160.4  |    |  | 90.2  |   
|Research and development expenses             |  |                         | 10.7  |      |  | 25.2   |    |  | 17.1  |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|Loss from operations                          |  |                         | (22.4 | )    |  | (139.4 | )  |  | (51.5 | ) 
|Interest income                               |  |                         | 8.2   |      |  | 9.0    |    |  | 2.6   |   
|Interest expense                              |  |                         |      |      |  | (1.3   | )  |  | (0.2  | ) 
|Other income (loss)                           |  |                         | (1.2  | )    |  | 3.8    |    |  | 0.4   |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|                                              |  |                         |       |      |  |        |    |  |       |   
|Net loss                                      |  |                         | (15.4 | )%   |  | (127.9 | )% |  | (48.7 | )%
|                                              |  |                         |       |      |  |        |    |  |       |   

35

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Year Ended December
31, 2010 Compared to Year Ended December 31, 2009

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | REVENUES. Revenues increased by $15.6
 million, or 150.7%, to $25.9 million in 2010 from $10.3 million in the same
 period in 2009. The increase in revenue is principally attributable to
 revenue of $15.2 million from AI, which was acquired on January 7, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Revenues
 from products increased by $3.0 million, or 46.6%, to $9.5 million in 2010
 from $6.5 million in the same period in 2009. Overall, the increase in
 revenues was attributable to AI product revenue of $2.2 million, which
 includes $0.7 million of revenue from Wal-Mart Stores, Inc. and an increase
 in IDS product revenue of $0.8 million resulting principally from an increase
 in revenue from the Raymond Corporation and Ford Motor Company of $1.1
 million and $0.4 million, respectively, as well as other customers, offset by
 decreased product sales to the U. S. Postal Service and NACCO Material
 Handling Group, Inc. of $0.9 million, and $0.8 million, respectively.                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Revenues
 from services increased by $12.5 million, or 325.8%, to $16.4 million in 2010
 from $3.8 million in the same period in 2009. The increase in service revenue
 is primarily attributable to AI service revenue of $12.9 million, which
 consists principally of revenue from Wal-Mart Stores, Inc. and GE Trailer
 Fleet Services of $5.2 million and $1.6 million, respectively, partially
 offset by a decrease in IDS service revenue of $0.4 million resulting
 principally from a decrease in the amount of services rendered to the U. S.
 Postal Service of $0.7 million.                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | COST OF REVENUES. Cost of revenues increased
 by $5.8 million, or 106.0%, to $11.4 million in 2010 from $5.6 million for
 the same period in 2009. The increase is attributable to the increase in
 revenue in 2010 from the acquisition of AI. Gross profit was $14.4 million in
 2010 compared to $4.8 million in 2009. As a percentage of revenues, gross
 profit increased to 55.8% in 2010 from 46.2% in 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Cost
 of products increased by $1.2 million, or 30.8%, to $5.1 million in 2010 from
 $3.9 million in the same period in 2009. Gross profit for products was $4.4
 million in 2010 compared to $2.6 million in 2009. The increase in gross
 profit was attributable to a gross profit contribution of $1.0 million from
 AI and an increase of $0.8 million in the IDS gross profit. As a percentage
 of product revenues, gross profit increased to 46.5% in 2010 from 40.0% in
 2009. The increase in gross profit as a percent of product revenue was due to
 an increase in the IDS gross profit percentage to 46.4% in 2010 from 40.0% in
 2009 and AI product revenue contributing a gross profit percentage of 46.6%
 in 2010. The increase in gross profit was primarily due to a $0.6 million
 reserve for inventory obsolescence in 2009.                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Cost
 of services increased by $4.7 million, or 280.6%, to $6.4 million in 2010
 from $1.7 million in the same period in 2009. Gross profit for services was
 $10.0 million in 2010 compared to $2.2 million in 2009. The increase in gross
 profit was attributable to a gross profit contribution of $7.9 million from
 AI partially offset by a decrease of $0.1 million in the IDS gross profit. As
 a percentage of service revenues, gross profit increased to 61.1% in 2010
 from 56.5% in 2009. The increase in gross profit as a percent of services
 revenue was due to an increase in the IDS gross profit percentage to 61.0% in
 2010 from 56.5% in 2009 and AI service revenue contributing a higher gross
 profit percentage of 61.2% in 2010. The increase in the IDS gross profit
 margin was primarily due to an increase in service revenue with fixed costs
 remaining constant, driving the margin higher.                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
 Selling, general and administrative expenses increased by $6.8 million, or
 41.0%, to $23.3 million in 2010 compared to $16.5 million in 2009. This
 increase was primarily attributable to AI selling, general and administrative
 expenses of $9.9 million consisting principally of payroll-related expenses
 of $3.6 million, consulting expenses of $2.5 million, depreciation and
 amortization expense of $1.9 million, travel expenses of $0.4 million and
 communication and technology expenses of $0.9 million, partially offset by
 decreases in payroll-related and stock-based compensation expense of $2.1
 million and professional fees of $1.5 million. As a percentage of revenues,
 selling, general and administrative expenses decreased to 90.2% in 2010 from
 160.4% in the same period in 2009, primarily due to the increase in revenue
 resulting from the AI acquisition.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | RESEARCH AND DEVELOPMENT EXPENSES. Research
 and development expenses increased by $1.8 million, or 70.1%, to $4.4 million
 in 2010 from $2.6 million in 2009 due primarily to AI research and
 development expenses of $2.4 million consisting principally of
 payroll-related and engineering development expenses of $1.4 million and $0.3
 million, respectively, offset by a decrease in payroll-related and
 stock-based compensation expense of $0.3 million. As a percentage of
 revenues, research and development expenses decreased to 17.1% in 2010 from
 25.2% in 2009, primarily due to the increase in revenue resulting from the AI
 acquisition.                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | INTEREST INCOME. Interest income decreased
 by $258,000 to $675,000 in 2010 from $933,000 in the same period in 2009.
 This decrease was attributable primarily to the decrease in cash and
 investments and in the rate of interest earned on the Companys cash and
 investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | INTEREST EXPENSE. Interest expense of
 $56,000 decreased by $74,000 in 2010 from $130,000 in the same period in
 2009. This decrease was due to the principal reduction in Companys line of
 credit borrowing facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

36

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| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | OTHER INCOME/EXPENSE. Other income of
 $104,000 in 2010 decreased $286,000 from other income of $390,000 in the same
 period in 2009. Other income for the year ended December 31, 2010
 consists principally of the remeasurement of the Didbox contingent consideration
 of $110,000.
| |                                                                                                                                                                                                                                                                                        
| | NET LOSS. Net loss was $12.6 million,
 or $(1.12) per basic and diluted share, in 2010, as compared to net loss of
 $13.2 million, or $(1.20) per basic and diluted share, in 2009. The
 decrease in the net loss was due primarily to the reasons described above.                    

Year Ended December
31, 2009 Compared to Year Ended December 31, 2008

REVENUES. Revenues
decreased by $16.7 million, or 61.9%, to $10.3 million in 2009 from $27.0
million in 2008. The decrease in revenues was primarily attributable to the
decrease in revenue from the U.S. Postal Service in the amount of $9.3 million
due to a spending freeze and from Wal-Mart Stores, Inc. in the amount of $9.6
million, partially offset in increases in revenue from Ford Motor Company of
$0.9 million, NACCO Materials Handling Group, Inc. of $1.0 million and American
Eagle Airlines of $0.7 million.

Revenues
from products decreased by $13.6 million, or 67.8%, to $6.5 million in 2009
from $20.1 million in 2008. The decrease in revenues was primarily attributable
to the decrease in revenue from the U.S. Postal Service and from Wal-Mart
Stores, Inc. noted above.

Revenues
from services decreased by $3.1 million, or 44.9%, to $3.8 million in 2009 from
$6.9 million in 2008. The decrease in service revenue is primarily attributable
to a decrease in the amount of services rendered to the U.S. Postal Service to
a spending freeze and Wal-Mart Stores, Inc., as noted above.

COST OF REVENUES.
Cost of revenues decreased by $7.9 million, or 58.8%, to $5.6 million in 2009
from $13.5 million in 2008. The decrease was attributable to the decrease in
revenue in 2009. Gross profit was $4.8 million in 2009 compared to $13.6
million in 2008. As a percentage of revenues, gross profit decreased to 46.2% in
2009 from 50.2% in 2008.

Cost
of products decreased by $6.1 million, or 61.2%, to $3.9 million in 2009 from
$10.0 million in 2008. Gross profit for products was $2.6 million in 2009
compared to $10.1 million in 2008. As a percentage of product revenues, gross
profit decreased to 40.0% in 2009 from 50.2% in 2008. The decrease in gross
profit was primarily due to a $0.6 million charge for inventory obsolescence.

Cost
of services decreased by $1.8 million, or 51.8%, to $1.7 million in 2009 from
$3.5 million in 2008. Gross profit for services was $2.2 million in 2009
compared to $3.5 million in 2008. As a percentage of service revenues, gross
profit increased to 56.5% in 2009 from 50.2% in 2008. The gross margin increase
was due to a mix in service revenue. During 2008, a higher percentage of our
service revenue was for vehicle and infrastructure installations for the U.S.
Postal Service. Those services are performed by subcontractors and have lower
gross margins than training and support services performed by our own field
staff. Also, maintenance revenue, which has higher margins, increased by
$568,000, or 77%, in 2009 compared to 2008.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses decreased $217,000, or 1.3%, to
$16.5 million in 2009 compared to $16.8 million in 2008. This decrease was
primarily attributable to decreases in non-payroll selling expenses of
$428,000, recruiting costs of $110,000, bonuses of $184,000, commissions of
$330,000, travel and entertainment expenses of $114,000, stock-based
compensation of $713,000, payroll related expenses of $277,000 as a result of
staff reductions in April 2009, no management incentive compensation and cost
reduction initiatives partially offset by increases in acquisition costs of
$1.3 million and other professional fees of $651,000. As a percentage of
revenues, selling, general and administrative expenses increased to 160.4% in
2009 from 62.0% in 2008 due to a decrease in revenue.

RESEARCH AND DEVELOPMENT EXPENSES.
Research and development expenses decreased $279,000, or 9.7%, to $2.6 million
in 2009 from $2.9 million in 2008. The decrease was primarily attributable to
decreases in payroll-related and stock compensation expenses of $333,000,
offset by an increase in consulting expenses of $113,000. As a percentage of
revenues, research and development expenses increased to 25.2% in 2009 from
10.7% in 2008 due primarily to a decrease in revenue in 2009 in comparison to
2008, as discussed above.

INTEREST INCOME.
Interest income decreased $1,293,000, or 58.1%, to $933,000 in 2009 from $2.2
million in 2008. This decrease was attributable primarily to the decrease in
interest rates earned on the Companys investments.

INTEREST EXPENSEInterest
expense increased by $130,000 in 2009 from $0 in 2008. This increase was due to
interest expense incurred on the Companys line of credit borrowing facility
which was not in place during 2008.

OTHER INCOME. Other
income of $390,000 in 2009 principally reflects the change in the fair value of
the Companys investment in auction-rate securities and the auction rate
securities right.

NET LOSS. Net loss
was $13.2 million, or $(1.20) per basic and diluted share, in 2009 as compared
to net loss of $4.2 million, or $(0.38) per basic and diluted share, in 2008.
The increase in net loss was due primarily to the reasons described above.

37

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Liquidity and Capital Resources

Historically,
except for our line of credit borrowing of $12.9 million in the first quarter
of 2009, our capital requirements have been funded primarily from the net
proceeds from the issuance of our securities, including any issuances of our
common stock upon the exercise of options and warrants. As of December 31,
2010, we had cash and marketable securities of $28.4 million and working
capital of $24.8 million, compared to cash and marketable securities of $60.1
million and working capital of $47.7 million as of December 31, 2009.

At
December 31, 2009 and 2010, the Company held approximately
$19.4 million and $-0- fair value in ARS and ARSR, respectively. These ARS
represented interests in collateralized pools of student loan receivables
issued by agencies established by counties, cities, states and other municipal
entities within the United States. Liquidity for these ARS is typically
provided by an auction process that resets the applicable interest rate at
pre-determined intervals. Starting in February 2008 and continuing through
2010, these securities failed to sell at auction. These failed auctions
represented liquidity risk exposure and are not defaults or credit events. As a
holder of the securities, the Company continued to receive interest on the ARS
until the ARS were sold or repurchased.

The Company
purchased all of the ARS it held from UBS AG (UBS). In October 2008, the
Company received a non-transferable offer (the Offer) from UBS for a put
right (the ARSR) permitting the Company to sell to UBS at par value all ARS
previously purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a commitment to
loan the Company 75% of the UBS-determined value of the ARS at any time until
the put is exercised at a variable interest rate equal to the lesser of:
(i) the applicable reference rate plus a spread set forth in the
applicable credit agreement and (ii) the then-applicable weighted-average
interest or dividend rate paid to the Company by the issuer of the ARS that is
pledged to UBS as collateral. In November 2008, the Company accepted the
Offer. In exchange for the Offer, the Company provided UBS with a general
release of claims (other than certain consequential damages claims) concerning
our ARS and granted UBS the right to purchase the Companys ARS at any time for
full par value. In June 2010, the Company exercised its right under the
ARSR to put back the ARS to UBS. During June and July 2010, UBS
repurchased all of the outstanding ARS at par value. The Company no longer
holds any ARS.

Business
Acquisitions

On April 18,
2008, we acquired the assets of PowerKey, the industrial vehicle monitoring
products division of International Electronics, Inc., a manufacturer of access
control and security equipment, for approximately $573,000, which includes
approximately $73,000 of direct acquisition costs. The tangible assets acquired
include inventory (totaling approximately $191,000) and fixed assets (totaling
approximately $4,000).

Allocation of
the purchase price of the intangible assets consists of the following: goodwill
(totaling approximately $200,000), trademarks and trade names (totaling
approximately $74,000), and a customer list (totaling approximately $104,000).

On October 19,
2009, we acquired Didbox Ltd. (Didbox), a privately held manufacturer
and marketer of vehicle operator identification systems based in the United
Kingdom (UK). The transaction was valued at approximately $660,000 and was
structured with $534,000 paid up front in cash and contingent consideration of
$110,000 due in 12 months based upon and subject to achievement of certain
revenue and operating profit targets. We originally recorded $110,000 of
contingent consideration based on the expected revenue and operating profits of
Didbox during the measurement period applicable to the contingent
consideration. The contingent consideration was reversed to other income during
the third quarter of 2010, as we did not expect Didbox to meet the revenue and
operating profit targets. The Company incurred acquisition-related expenses of
approximately $43,000, which are included in selling, general and
administrative expenses in the consolidated statement of operations for the
year ended December 31, 2009. The Didbox business compliments the Companys
existing businesses with access to OEM dealer network in the UK, and the
ability to add the I.D. Systems solution set to its product line. In addition,
the acquisition is expected to provide the Company with access to a broader
base of customers in Europe.

The assets and
liabilities of the acquired businesses are accounted for under the purchase
method of accounting and recorded at their estimated fair values at the dates
of acquisition. The excess of the purchase price over the estimated fair values
of the net assets acquired was recorded as goodwill. The goodwill is not
expected to be deductible for tax purposes. The allocation of the Didbox
purchase price consists of the following:

|                               |  |   |          |  
|------------------------------ |  | - | -------- | -
|Current
 assets                |  | $ | 93,000   |  
|Other assets                   |  |   | 36,000   |  
|Current
 liabilities           |  |   | (104,000 | )
|Goodwill                       |  |   | 419,000  |  
|Trademarks
 and tradenames     |  |   | 61,000   |  
|Customer
 list                 |  |   | 56,000   |  
|Other
 intangibles             |  |   | 83,000   |  
|                               |  |   |          |  
|Fair value
 of assets acquired |  | $ | 644,000  |  
|                               |  |   |          |  

38

---



The fair value
of the current assets acquired includes trade accounts receivables with a fair
value of $56,000. The gross amount due is $56,000, which is expected to be
collected. The results of operations of acquired businesses have been included
in the consolidated statement of operations as of the effective date of
acquisition. Pro forma results of operations have not been presented because
the effects of the acquisitions were not material.

On January 7,
2010, the Company entered into a Membership Interest Purchase Agreement (the
Purchase Agreement) with General Electric Capital Corporation (GECC) and GE
Asset Intelligence, LLC ( GEAI ), pursuant to which the Company acquired
GEAIs telematics business (the GEAI Business) through the purchase of 100%
of the membership interests of Asset Intelligence, LLC (AI), a newly formed,
wholly owned subsidiary of GEAI into which substantially all of the assets,
including intellectual property, and liabilities of the GEAI Business had been
transferred immediately prior to the closing. Effective with the closing of the
transaction on January 7, 2010, AI became a wholly owned subsidiary of the
Company. In connection with the transaction, AI offered employment to all of
the former employees of the GEAI Business. The AI business compliments the
Companys existing businesses, as AIs focus on trucking, rail, marine and
intermodal applications significantly expands the scope of assets addressed by
I.D. Systems product solutions. In addition, the acquisition is expected to
provide the Company with access to a broader base of customers.

AI combines
web-based software technologies with satellite and cellular communications to
deliver data-driven telematics solutions for supply chain asset management.
These solutions help secure and optimize the performance of trailers, railcars,
containers, and the freight they carry, enabling shippers and carriers to
maximize security and efficiency throughout their supply chains.

AIs VeriWise
product platform provides comprehensive real-time data for faster, more
informed decision-making in multiple supply chain applications:

| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Asset
 Optimizationcombining web-based asset visibility and advanced telemetry data
 to monitor the condition of fleet assets, streamline asset deployment,
 optimize utilization, and maximize return on investment.                                                                  
| |   |                                                                                                                                                                                                                                                                                         
| |  | Cold Chain
 Managementmaintaining the condition and quality of temperature-sensitive cargo
 from point A to point B, and all the points in between.                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                         
| |  | Fleet
 Maintenanceutilizing sensor technologies, real-time data and a wealth of
 transportation maintenance knowledge to help control maintenance costs,
 improve preventative maintenance practices, increase asset up-time, extend
 asset life, and reduce overall cost of ownership.
| |   |                                                                                                                                                                                                                                                                                         
| |  | Fuel
 Managementmonitoring key factors in fuel consumption, such as tire pressure
 and engine idle time, to help optimize fuel performance and reduce transportation
 costs.                                                                                                           
| |   |                                                                                                                                                                                                                                                                                         
| |  | Security
 & Safetyprotecting valuable assets and cargo throughout the supply
 chain.                                                                                                                                                                                                   

39

---



Under the
terms of the Purchase Agreement, the Company paid consideration of $15 million
in cash at closing. In addition, the Company would have been required to pay
additional cash consideration of up to $2 million in or about February 2011,
contingent upon the number of new units of telematics equipment sold
or subject to a binding order to be sold by AI during the year ending
December 31, 2010. However, the applicable units targets were not achieved and
therefore none of the additional contingent consideration was earned.

The Company
incurred acquisition-related expenses of approximately $1,355,000, of which
$1,241,000 are included in selling, general and administrative expenses in 2009
and $114,000 in 2010.

The
acquisition was accounted for using the acquisition method of accounting and
the purchase price was assigned to the net assets acquired based on the fair
value of such assets and liabilities at the date of acquisition. The Company
originally recorded in the preliminary purchase price allocation $1,017,000 of
contingent consideration based on the estimated number of new units of
telematics equipment to be sold in 2010. The contingent consideration was
estimated using a probability weighted calculation of the number of new units
of telematics equipment expected to be sold in 2010. The contingent
consideration was reversed during the second quarter of 2010 based on revised
forecasts which indicated AI would not meet the required number of new unit
sales during the measurement period for the contingent consideration. The
following table summarizes the final allocation of the AI purchase price to the
assets acquired and liabilities assumed at the date of acquisition:

|                                     |  |   |            |  
|------------------------------------ |  | - | ---------- | -
|Current
 assets, excluding inventory |  | $ | 4,709,000  |  
|Inventory                            |  |   | 5,236,000  |  
|Other
 assets, net                   |  |   | 3,218,000  |  
|Current
 liabilities                 |  |   | (5,746,000 | )
|Intangibles                          |  |   | 6,365,000  |  
|Goodwill                             |  |   | 1,218,000  |  
|                                     |  |   |            |  
|                                     |  |   |            |  
|Fair value
 of assets acquired       |  | $ | 15,000,000 |  
|                                     |  |   |            |  

The goodwill
arising from the acquisition consists largely of the synergies and cost
reductions through economies of scale expected from combining the operations of
the Company and AI. The goodwill is expected to be fully deductible for tax
purposes.

40

---



Operating Activities

Net cash used
in operating activities was $3.6 million for the year ended
December 31, 2010, compared to net cash used in operating activities of
$6.9 million for the year ended December 31, 2009. The net cash used in
operating activities for the year ended December 31, 2010 reflects a net
loss of $12.6 million and includes non-cash charges of $1.6 million
for stock-based compensation and $2.4 million for depreciation and
amortization expense. Changes in working capital items, net of
$4.2 million of working capital acquired in the AI transaction, included:

| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease
 in accounts receivable of $0.6 million resulting from increased cash
 collections;                                 
| |   |                                                                                                                                
| |  | an increase
 in deferred costs, prepaid expenses and other assets of $3.3 million;                                             
| |   |                                                                                                                                
| |  | an increase
 in deferred revenue of $4.5 million;                                                                              
| |   |                                                                                                                                
| |  | a decrease
 in inventory of $2.4 million; and                                                                                  
| |   |                                                                                                                                
| |  | an increase
 in accounts payable and accrued expenses of $1.6 million, primarily due
 to the timing of payments to our vendors.

Net cash used
in operating activities was $6.9 million for the year ended December 31, 2009,
compared to net cash used in operating activities of $4.9 million for the year
ended December 31, 2008. The net cash used in operating activities for the year
ended December 31, 2009 reflects a net loss of $13.2 million and includes
non-cash charges of $2.2 million for stock-based compensation, $0.6 million for
inventory reserves and $0.5 million for depreciation and amortization expense.
Changes in working capital items included:

|  |                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a decrease
 in accounts receivable of $5.0 million resulting from the cash collections
 related to receivables outstanding at December 31, 2008 and the overall
 decrease in revenue;
| | an increase
 in inventory of $1.8 million; and                                                                                                                                       
| | a decrease
 in accounts payable and accrued expenses of $0.4 million primarily due to the
 timing of payments to our vendors.                                                        

Investing Activities

Net cash
provided by investing activities was $10.3 million for the year ended December 31,
2010, compared to net cash provided by investing activities of
$2.2 million for the year ended December 31, 2009. The change was due
primarily to net redemptions of investments of $26.8 million, partially
offset by $15.0 million used for the purchase of AI and $1.5 million
in fixed asset additions.

Net cash
provided by investing activities was $2.2 million for the year ended December
31, 2009, compared to net cash provided by investing activities of $15.4
million for the year ended December 31, 2008. The change was due primarily to
an increase in the maturities of investments, which was partially offset by
fewer purchases of investments and the business acquisition of Didbox Ltd.

Financing Activities

Net cash used
in financing activities was $11.7 million for the year ended
December 31, 2010, compared to net cash provided by financing activities
of $11.6 million for the year ended December 31, 2009. The decrease was
principally due to principal payments on the UBS line of credit from the
redemption of the ARS of $11.6 million in 2010 and the borrowing of
$12.9 million from the UBS line of credit facility in 2009.

Net cash
provided by financing activities was $11.6 million for the year ended December
31, 2009, compared to net cash used in financing activities of $3.0 million for
the year ended December 31, 2008. The increase was due to the borrowing of
$12.9 million from the UBS line of credit facility.

Capital Requirements

We believe
that with the proceeds received from our public offering that was completed by
us in March 2006, the cash we have on hand and operating cash flows we expect
to generate, we will have sufficient funds available to cover our capital
requirements for at least the next 12 months.

Our capital
requirements depend on a variety of factors, including, but not limited to, the
length of the sales cycle, the rate of increase or decrease in our existing
business base, the success, timing, and amount of investment required to bring
new products to market, revenue growth or decline and potential acquisitions.
Failure to generate positive cash flow from operations will have a material
adverse effect on our business, financial condition and results of operations.
We may determine in the future that we require additional funds to meet our long-term
strategic objectives, including for the completion of potential acquisitions.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve significant restrictive covenants, and we
cannot assure you that such financing will be extended on terms acceptable to
us or at all.

41

---



Term Loan

In January
2003, we closed on a five-year term loan for $1,000,000 with a financial
institution. Interest at the 30-day LIBOR plus 1.75% and principal are payable
monthly. To hedge the loans floating interest expense, we entered into an
interest rate swap contemporaneously with the closing of the loan and fixed the
rate of interest at 5.28% for the five-year term. At December 31, 2007, the
outstanding balance on the loan was $19,000. In February 2008, we paid off the
remaining principal balance on the loan which was $0 at December 31, 2008. The
term-loan expired in 2008.

Line of Credit

In October
2008, the Company received an offer (the Offer) from UBS for a put right (the
ARSR) permitting the Company to sell to UBS at par value all
auction-rate securities (ARS) held by the Company, all of which
were purchased by the Company from UBS, at a future date (any time
during a two-year period beginning June 30, 2010). Included as part of the
Offer, the Company received a commitment to obtain a loan for 75% of the
UBS-determined value of the ARS at any time until the put option is exercised
at a variable interest rate (1.24% at December 31, 2009) equal to the lesser of:
(i) the applicable reference rate plus a spread set forth in the applicable
credit agreement and (ii) the then-applicable weighted average interest or
dividend rate paid to the Company by the issuer of the ARS that is pledged to
UBS as collateral. The Company accepted the Offer in November 2008. In March
2009, the Company borrowed $12,900,000 (which amount was equal to 75% of the
UBS-determined value of the ARS) against this credit facility. Principal
payments reduced the Companys obligation to $11,638,000 at December 31, 2009.
This line of credit facility was payable on demand. The line of credit facility
was repaid in July 2010 from the redemption of the ARS. Upon the redemption of
the ARS, the line of credit expired.

Contractual Obligations and Commitments

The following
table summarizes our significant contractual obligations and commitments as of
December 31, 2010:

|                  |  |                       |           |                     |   |              |  |              |           |                |   |         |  |   |           | 
|----------------- |  | --------------------- | --------- | ------------------- | - | ------------ |  | ------------ | --------- | -------------- | - | ------- |  | - | --------- | 
|                  |  | Payment due by Period |          
|                  |  |                       |          
|                  |  | Total                 |           | Less than
 one year |   | 1 to 3 years |  | 3 to 5 years |           | After 5
 years |  
|                  |  |                       |           |                     |   |              |  |              |           |                |  
|Operating
 leases |  | $                     | 4,946,000 |                     | $ | 634,000      |  | $            | 1,315,000 |                | $ | 943,000 |  | $ | 2,054,000 | 

Purchase
orders or contracts for the purchase of raw materials and other goods and
services are not included in the table above. We are not able to determine the
aggregate amount of such purchase orders that represent contractual
obligations, as purchase orders may represent authorizations to purchase rather
than binding agreements. Although we have entered into contracts for services,
the obligations under these contracts were not significant and the contracts
generally contain clauses allowing for cancellation without significant
penalty.

The expected
timing or payment of obligations discussed above is estimated based on current
information. Timing of payments and actual amounts paid may be different
depending on changes to agreed upon amounts for some obligations.

Inflation

We believe our
operations have not been and, in the foreseeable future, will not be,
materially and adversely affected by inflation or changing prices.

Off-Balance Sheet Arrangements

We do not have
any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.

42

---



Recently Issued Accounting Pronouncements

In
June 2009, the Financial Accounting Standards Board (the FASB) issued a
standard which provides guidance to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferors continuing involvement, if any, in transferred
financial assets. The standard is effective as of the beginning of each
reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. The adoption of
this guidance did not have a material impact on the Companys consolidated
financial position or results of operations.

In
October 2009, the FASB issued a standard which establishes the accounting
and reporting guidance for arrangements including multiple revenue-generating
activities. This standard provides amendments to the criteria for separating
deliverables, measuring and allocating arrangement consideration to one or more
units of accounting. The amendments in this standard also establish a selling
price hierarchy for determining the selling price of a deliverable.
Significantly enhanced disclosures are also required to provide information about
a vendors multiple-deliverable revenue arrangements, including information
about the nature and terms, significant deliverables, and its performance
within arrangements. The amendments also require providing information about
the significant judgments made and changes to those judgments and about how the
application of the relative selling-price method affects the timing or amount
of revenue recognition. The amendments in this standard are effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early application is
permitted. The adoption of this guidance is not expected to have a material
impact on the Companys consolidated results of operations or financial position.

In October 2009,
the FASB issued a standard which changes the accounting model for revenue
arrangements that include both tangible products and software elements that are
essential to the functionality and scopes these products out of current
software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered essential to the
functionality. The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance
surrounding revenue arrangements with multiple deliverables. The amendments in
this standard are effective prospectively for revenue arrangements entered into
or materially modified in the fiscal years beginning on or after June 15,
2010. Early application is permitted. The adoption of this guidance is not
expected to have a material impact on the Companys consolidated results of
operations or financial position.

In
January 2010, the FASB issued additional guidance for improving disclosures
about fair value measurement. Under this guidance, two new disclosures are
required: (i) significant transfers in and out of Level 1 and 2
measurements and the reasons for the transfers and (ii) a gross
presentation of activity within the Level 3 rollforward. The guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the rollforward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010. The adoption of this guidance did not have and is not
expected to have a material impact on the Companys consolidated results of
operations or financial position.

In December
2010, the FASB issued an amendment which effects entities that have recognized
goodwill and have one or more reporting units whose carrying amounts for the
purposes of Step 1 of the goodwill impairment test is zero or negative. The
amendment modifies Step 1 so that for those reporting units, the entity is
required to perform Step 2 of the goodwill impairment test if it is more likely
than not that a goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity should consider
whether there are adverse qualitative factors, including the examples provided
in ASC paragraph 350-20-35-30, in determining whether an interim goodwill
impairment test between annual test dates is necessary. The standard allows an
entity to use either the equity or enterprise valuation premise to determine
the carrying amount of a reporting unit. This standard is effective for the
Company for fiscal years, and interim periods within those years, beginning
after December 15, 2010. The Company is currently evaluating the impact that
the adoption of this standard will have on its consolidated financial
statements.

In December
2010, the FASB issued an amendment which specifies that if a public entity
presents comparative financial statements, the entity should disclose revenue
and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendment also expands the
supplemental pro forma disclosures under Topic 805 to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendment is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010.

43

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Item 7A.
Quantitative and Qualitative Disclosures
About Market Risk

We are subject
to market risks in the form of changes in corporate income tax
rates, which risks are currently immaterial to us.

We also
are subject to market risk from changes in interest rates which could
affect our future results of operations and financial condition. We manage our
exposure to these risks through our regular operating and financing activities.
As of December 31, 2010, we had cash, cash equivalents and investments of $28.4
million.

As of December 31,
2010, the carrying value of our cash and cash equivalents approximated fair
value. In a declining interest rate environment, as short-term investments
mature, reinvestment occurs at less favorable market rates, negatively
impacting future investment income. We maintain our cash and cash equivalents
with major financial institutions; however, our cash and cash equivalent
balances with these institutions exceed the Federal Deposit Insurance
Corporation (FDIC) insurance limits. While we monitor on a systematic basis
the cash and cash equivalent balances in the operating accounts and adjust the
balances as appropriate, these balances could be impacted if one or more of the
financial institutions with which we deposit our cash and cash equivalents fails
or is subject to other adverse conditions in the financial or credit markets.
To date, we have experienced no loss of principal or lack of access to our
invested cash or cash equivalents; however, we can provide no assurance that
access to our invested cash and cash equivalents will not be affected if the
financial institutions in which we hold our cash and cash equivalents fail or
the financial and credit markets continue to deteriorate.

At December
31, 2009, we held approximately $19.4 million fair value in investments in ARS
and ARSR. The Company purchased all the ARS it held from UBS. These ARS
represented interests in collateralized pools of student loan receivables
issued by agencies established by counties, cities, states and other municipal
entities within the United States. Liquidity for these ARS is typically
provided by an auction process that resets the applicable interest rate at
pre-determined intervals. In February 2008 and continuing into 2009, these
securities failed to sell at auction. Holders of the securities continue to
receive interest on the investments, and the securities continue to be
auctioned at the pre-determined intervals (typically every 28 days) until the
auction succeeds, the issuer calls the securities, or they mature. These failed
auctions represent liquidity risk exposure and are not defaults or credit
events. A decline in the value of these securities that is not temporary could
have materially adversely affected our liquidity and income; however, all of
the securities have been redeemed, as described below.

In October
2008, we received a non-transferable offer (the Offer) from UBS for a put
right permitting us to sell to UBS at par value all ARS previously purchased
from UBS at a future date (any time during a two-year period beginning June 30,
2010). The Offer also included a commitment to loan us 75% of the
UBS-determined value of the ARS at any time until the put is exercised at a
variable interest rate equal to the lesser of: (i) the applicable reference
rate plus a spread set forth in the applicable credit agreement and (ii) the
then-applicable weighted average interest or dividend rate paid to the Company
by the issuer of the ARS that is pledged to UBS as collateral. In November
2008, the Company accepted the Offer. In exchange for the Offer, we
provided UBS with a general release of claims (other than certain
consequential damages claims) concerning our ARS and granted UBS the right to
purchase our ARS at any time for full par value. Our right under the Offer was
in substance a put right (with the strike price equal to the par value of the
ARS) which we recorded as an asset, measured at its fair value with the
resultant gain recognized in earnings. We initially recorded the put right at a
fair value of $2.0 million and recognized the gain and a $2.3 million loss in
the fair value of the ARS in operations. As we had classified the ARS as
trading securities, the change in fair value of the ARS was charged to
operations. The unrealized (loss) gain charged to operations in 2008, 2009 and
2010 was $(338,000), $338,000 and $-0-, respectively, which is included in
other expense. The fair value of the put right was based on an approach in
which the present value of all expected future cash flows were subtracted from
the current fair market value of the security and the resultant value was
calculated as a future value at an interest rate reflective of counterparty
risk. The ARS and ARSR were redeemed by July 2010 and we no longer hold any
ARS.

44

---



Item 8. Financial
Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                  |  |     
|----------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                  |  | Page
|                                                                                                                  |  |     
|Report of
 Independent Registered Public Accounting Firm                                                          |  | 46  
|Consolidated Balance
 Sheets at December 31, 2009 and 2010                                                        |  | 47  
|Consolidated
 Statements of Operations for the Years
 Ended December 31, 2008, 2009 and 2010                      |  | 48  
|Consolidated
 Statements of Changes in Stockholders Equity for the Years
 Ended December 31, 2008, 2009 and 2010 |  | 49  
|Consolidated
 Statements of Cash Flows for the Years
 Ended December 31, 2008, 2009 and 2010                      |  | 50  
|Notes to the Consolidated
 Financial Statements                                                                   |  | 51  

45

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of
Directors and Stockholders of

I.D. Systems,
Inc.

We have
audited the accompanying consolidated balance sheets of I.D. Systems, Inc. and
subsidiaries as of December 31, 2009 and 2010, and the related consolidated
statements of operations, changes in stockholders equity and cash flows for
each of the years in the three-year period ended December 31, 2010. Our audits
also include the consolidated financial statement schedule II  Valuation and
Qualifying Accounts for each of the years in the three-year period ended
December 31, 2010 listed in Item 15.(a)(2) in the accompanying index. These
consolidated financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted
our audits in accordance with the standards of the Public Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audits of the
financial statements include consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of I.D. Systems, Inc.
and subsidiaries as of December 31, 2009 and 2010, and the results of their
consolidated operations and their consolidated cash flows for each of the years
in the three-year period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
consolidated financial statement schedule referred to above, when considered in
relation to the basic consolidated financial statements, taken as a whole,
presents fairly, in all material respects, the information stated therein.

As described in Note 2 to the consolidated financial
    statements, the Company adopted the accounting guidance related to business
    combinations, effective for business combinations entered into on or after
January 1, 2009.

/s/
EisnerAmper LLP

New York, New
York

March 29, 2011

46

---



|                                   
|-----------------------------------
|I.D. SYSTEMS, INC. AND SUBSIDIARIES
|Consolidated Balance Sheets        

|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                                                                                               |  | As of December 31, |            
|                                                                                                                                                                                                                                               |  | 2009               |             | 2010 |  
|                                                                                                                                                                                                                                               |  |                    |             |      |  
|ASSETS                                                                                                                                                                                                                                         |  |                    |             |      |   |             |  
|Current assets:                                                                                                                                                                                                                                |  |                    |             |      |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                      |  | $                  | 19,481,000  |      | $ | 14,491,000  |  
|Investments  short term                                                                                                                                                                                                                       |  |                    | 33,909,000  |      |   | 4,565,000   |  
|Accounts receivable, net of allowance for
 doubtful accounts of $106,000 and $161,000 in 2009 and 2010, respectively                                                                                                                           |  |                    | 3,252,000   |      |   | 7,044,000   |  
|Notes and sales-type lease receivable -
 current                                                                                                                                                                                               |  |                    |            |      |   | 353,000     |  
|Inventory, net                                                                                                                                                                                                                                 |  |                    | 4,487,000   |      |   | 7,295,000   |  
|Interest receivable                                                                                                                                                                                                                            |  |                    | 97,000      |      |   | 53,000      |  
|Deferred costs - current                                                                                                                                                                                                                       |  |                    |            |      |   | 1,159,000   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                      |  |                    | 686,000     |      |   | 1,211,000   |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Total current assets                                                                                                                                                                                                                           |  |                    | 61,912,000  |      |   | 36,171,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Investments long term                                                                                                                                                                                                                         |  |                    | 6,752,000   |      |   | 9,364,000   |  
|Notes and sales-type lease receivable 
 less current portion                                                                                                                                                                                  |  |                    |             |      |   | 839,000     |  
|Deferred costs  less current portion                                                                                                                                                                                                          |  |                    |             |      |   | 2,978,000   |  
|Fixed assets, net                                                                                                                                                                                                                              |  |                    | 917,000     |      |   | 3,853,000   |  
|Goodwill                                                                                                                                                                                                                                       |  |                    | 619,000     |      |   | 1,837,000   |  
|Intangible assets, net                                                                                                                                                                                                                         |  |                    | 375,000     |      |   | 5,571,000   |  
|Other assets                                                                                                                                                                                                                                   |  |                    |            |      |   | 272,000     |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  | $                  | 70,575,000  |      | $ | 60,885,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|LIABILITIES                                                                                                                                                                                                                                    |  |                    |             |      |   |             |  
|Current liabilities:                                                                                                                                                                                                                           |  |                    |             |      |   |             |  
|Accounts payable and accrued expenses                                                                                                                                                                                                          |  | $                  | 2,094,000   |      | $ | 9,141,000   |  
|Line of credit                                                                                                                                                                                                                                 |  |                    | 11,638,000  |      |   |            |  
|Deferred revenue                                                                                                                                                                                                                               |  |                    | 501,000     |      |   | 2,186,000   |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Total current liabilities                                                                                                                                                                                                                      |  |                    | 14,233,000  |      |   | 11,327,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Deferred rent                                                                                                                                                                                                                                  |  |                    |            |      |   | 199,000     |  
|Deferred revenue                                                                                                                                                                                                                               |  |                    | 461,000     |      |   | 4,614,000   |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    | 14,694,000  |      |   | 16,140,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Commitments and Contingencies (Note 21)                                                                                                                                                                                                        |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|STOCKHOLDERS EQUITY                                                                                                                                                                                                                           |  |                    |             |      |   |             |  
|Preferred stock; authorized 5,000,000
 shares, $0.01 par value; none issued                                                                                                                                                                    |  |                    |            |      |   |            |  
|Common stock; authorized 50,000,000 shares,
 $0.01 par value; 12,284,000 and 12,491,000 shares issued at December 31, 2009
 and 2010, respectively; shares outstanding, 11,075,000 and 11,242,000 at
 December 31, 2009 and 2010, respectively |  |                    | 120,000     |      |   | 121,000     |  
|Additional paid-in capital                                                                                                                                                                                                                     |  |                    | 103,596,000 |      |   | 105,156,000 |  
|Accumulated deficit                                                                                                                                                                                                                            |  |                    | (36,859,000 | )    |   | (49,470,000 | )
|Accumulated other comprehensive income                                                                                                                                                                                                         |  |                    | (60,000     | )    |   | (37,000     | )
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|                                                                                                                                                                                                                                               |  |                    | 66,797,000  |      |   | 55,770,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Treasury stock; 1,209,000 shares and
 1,249,000 shares at cost at December 31, 2009 and 2010, respectively                                                                                                                                     |  |                    | (10,916,000 | )    |   | (11,025,000 | )
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Total stockholders equity                                                                                                                                                                                                                     |  |                    | 55,881,000  |      |   | 44,745,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                                                     |  | $                  | 70,575,000  |      | $ | 60,885,000  |  
|                                                                                                                                                                                                                                               |  |                    |             |      |   |             |  

SEE ACCOMPANYING NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

47

---



|                                     
|-------------------------------------
|I.D. SYSTEMS, INC. AND SUBSIDIARIES  
|Consolidated Statements of Operations

|                                                                |  |                         |            |      |   |             |   |   |             |  
|--------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                |  | Year Ended December 31, |           
|                                                                |  |                         |           
|                                                                |  | 2008                    |            | 2009 |   | 2010        |  
|                                                                |  |                         |            |      |   |             |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Revenues:                                                       |  |                         |            |      |   |             |   |   |             |  
|Products                                                        |  | $                       | 20,072,000 |      | $ | 6,470,000   |   | $ | 9,483,000   |  
|Services                                                        |  |                         | 6,974,000  |      |   | 3,846,000   |   |   | 16,378,000  |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         | 27,046,000 |      |   | 10,316,000  |   |   | 25,861,000  |  
|Cost of
 Revenues:                                              |  |                         |            |      |   |             |   |   |             |  
|Cost of
 products                                               |  |                         | 9,996,000  |      |   | 3,882,000   |   |   | 5,077,000   |  
|Cost of
 services                                               |  |                         | 3,470,000  |      |   | 1,672,000   |   |   | 6,363,000   |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         | 13,466,000 |      |   | 5,554,000   |   |   | 11,440,000  |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Gross Profit                                                    |  |                         | 13,580,000 |      |   | 4,762,000   |   |   | 14,421,000  |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Operating
 expenses:                                            |  |                         |            |      |   |             |   |   |             |  
|Selling, general and administrative
 expenses                   |  |                         | 16,760,000 |      |   | 16,543,000  |   |   | 23,326,000  |  
|Research and development expenses                               |  |                         | 2,883,000  |      |   | 2,604,000   |   |   | 4,429,000   |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         | 19,643,000 |      |   | 19,147,000  |   |   | 27,755,000  |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Loss from
 operations                                           |  |                         | (6,063,000 | )    |   | (14,385,000 | ) |   | (13,334,000 | )
|Interest
 income                                                |  |                         | 2,226,000  |      |   | 933,000     |   |   | 675,000     |  
|Interest
 expense                                               |  |                         |           |      |   | (130,000    | ) |   | (56,000     | )
|Other (loss)
 income                                            |  |                         | (338,000   | )    |   | 390,000     |   |   | 104,000     |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Net loss                                                        |  | $                       | (4,175,000 | )    | $ | (13,192,000 | ) | $ | (12,611,000 | )
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Net loss per
 share  basic and diluted                         |  | $                       | (0.38      | )    | $ | (1.20       | ) | $ | (1.12       | )
|                                                                |  |                         |            |      |   |             |   |   |             |  
|                                                                |  |                         |            |      |   |             |   |   |             |  
|Weighted
 average common shares outstanding  basic and diluted |  |                         | 10,887,000 |      |   | 10,991,000  |   |   | 11,239,000  |  
|                                                                |  |                         |            |      |   |             |   |   |             |  

SEE ACCOMPANYING NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

48

---



I.D. SYSTEMS, INC.Consolidated Statements of Changes in Stockholders
Equity

|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|-------------------------------------------------------------------------- |  | --------------- |  | ------------------------ | ------- | ------------------ | - | ----------------------------------- |  | ------------- | ----------- | ------------------- | - | -------- | - | - | ----------- | - | - | ----------- | -
|                                                                           |  | Common Stock    |  | AdditionalPaid-inCapital |         | AccumulatedDeficit |   | AccumulatedOtherComprehensiveIncome |  | TreasuryStock |             | StockholdersEquity |  
|                                                                           |  |                 |  |                          |         |                    |   |                                    
|                                                                           |  | Number ofShares |  | Amount                   |         |                    |   |                                     |  |              
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Balance at January 1, 2008                                                 |  | 11,561,000      |  | $                        | 115,000 |                    | $ | 97,076,000                          |  | $             | (19,492,000 | )                   |   | 11,000   |   | $ | (6,040,000  | ) | $ | 71,670,000  |  
|Net loss                                                                   |  |                 |  |                          |         |                    |   |                                     |  |               | (4,175,000  | )                   |   |          |   |   |             |   |   | (4,175,000  | )
|Comprehensive loss - unrealized gain on investments                        |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   | 35,000   |   |   |             |   |   | 35,000      |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Total comprehensive loss                                                   |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   | (4,140,000  | )
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Shares issued pursuant to exercise of stock options                        |  | 505,000         |  |                          | 5,000   |                    |   | 1,372,000                           |  |               |             |                     |   |          |   |   |             |   |   | 1,377,000   |  
|Shares repurchased                                                         |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   | (4,387,000  | ) |   | (4,387,000  | )
|Shares withheld pursuant to stock issuance                                 |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   | (424,000    | ) |   | (424,000    | )
|Issuance of restricted stock                                               |  | 16,000          |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Stock based compensation  restricted stock                                |  |                 |  |                          |         |                    |   | 513,000                             |  |               |             |                     |   |          |   |   |             |   |   | 513,000     |  
|Stock based compensation performance shares                                |  |                 |  |                          |         |                    |   | 292,000                             |  |               |             |                     |   |          |   |   |             |   |   | 292,000     |  
|Stock based compensation - options                                         |  |                 |  |                          |         |                    |   | 2,184,000                           |  |               |             |                     |   |          |   |   |             |   |   | 2,184,000   |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Balance at December 31, 2008                                               |  | 12,082,000      |  | $                        | 120,000 |                    | $ | 101,437,000                         |  | $             | (23,667,000 | )                   | $ | 46,000   |   | $ | (10,851,000 | ) | $ | 67,085,000  |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Net loss                                                                   |  |                 |  |                          |         |                    |   |                                     |  |               | (13,192,000 | )                   |   |          |   |   |             |   |   | (13,192,000 | )
|Foreign currency translation adjustment                                    |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   | 1,000    |   |   |             |   |   | 1,000       |  
|Comprehensive income- unrealized loss on investments                       |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   | (107,000 | ) |   |             |   |   | (107,000    | )
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Total comprehensive loss                                                   |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   | (13,298,000 | )
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Shares issued pursuant to exercise of stock options                        |  | 1,000           |  |                          |         |                    |   | 2,000                               |  |               |             |                     |   |          |   |   |             |   |   | 2,000       |  
|Shares withheld pursuant to issuance of restricted and performance
 shares |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   | (65,000     | ) |   | (65,000     | )
|Issuance of restricted and performance stock                               |  | 201,000         |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Stock based compensation  restricted stock                                |  |                 |  |                          |         |                    |   | 205,000                             |  |               |             |                     |   |          |   |   |             |   |   | 205,000     |  
|Stock based compensation performance shares                                |  |                 |  |                          |         |                    |   | 15,000                              |  |               |             |                     |   |          |   |   |             |   |   | 15,000      |  
|Stock based compensation - options                                         |  |                 |  |                          |         |                    |   | 1,937,000                           |  |               |             |                     |   |          |   |   |             |   |   | 1,937,000   |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Balance at December 31, 2009                                               |  | 12,284,000      |  | $                        | 120,000 |                    | $ | 103,596,000                         |  | $             | (36,859,000 | )                   | $ | (60,000  | ) | $ | (10,916,000 | ) | $ | 55,881,000  |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Net loss                                                                   |  |                 |  |                          |         |                    |   |                                     |  |               | (12,611,000 | )                   |   |          |   |   |             |   |   | (12,611,000 | )
|Foreign currency translation adjustment                                    |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   | (23,000  | ) |   |             |   |   | (23,000     | )
|Comprehensive income  unrealized gain on investments                      |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   | 46,000   |   |   |             |   |   | 46,000      |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Total comprehensive loss                                                   |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   | (12,588,000 | )
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |  
|Shares issued pursuant to exercise of stock options                        |  | 1,000           |  |                          | 1,000   |                    |   | 2,000                               |  |               |             |                     |   |          |   |   |             |   |   | 3,000       |  
|Shares repurchased                                                         |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   | (99,000     | ) |   | (99,000     | )
|Shares withheld pursuant to issuances of restricted and performance
 stock |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   | (10,000     | ) |   | (10,000     | )
|Issuance of restricted and performance stock                               |  | 206,000         |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Stock based compensation  restricted stock                                |  |                 |  |                          |         |                    |   | 273,000                             |  |               |             |                     |   |          |   |   |             |   |   | 273,000     |  
|Stock based compensation  performance shares                              |  |                 |  |                          |         |                    |   | 35,000                              |  |               |             |                     |   |          |   |   |             |   |   | 35,000      |  
|Stock based compensation - options                                         |  |                 |  |                          |         |                    |   | 1,250,000                           |  |               |             |                     |   |          |   |   |             |   |   | 1,250,000   |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  
|Balance at December 31, 2010                                               |  | 12,491,000      |  | $                        | 121,000 |                    | $ | 105,156,000                         |  | $             | (49,470,000 | )                   | $ | (37,000  | ) | $ | (11,025,000 | ) | $ | 44,745,000  |  
|                                                                           |  |                 |  |                          |         |                    |   |                                     |  |               |             |                     |   |          |   |   |             |   |   |             |  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

49

---



I.D. SYSTEMS, INC.Consolidated Statements of Cash Flows

|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|-------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                                       |  | Year Ended December 31, |            
|                                                                                       |  |                         |            
|                                                                                       |  | 2008                    |             | 2009 |   | 2010        |  
|                                                                                       |  |                         |             |      |   |             |  
|Cash flows from operating activities:                                                  |  |                         |             |      |   |             |   |   |             |  
|Net loss                                                                               |  | $                       | (4,175,000  | )    | $ | (13,192,000 | ) | $ | (12,611,000 | )
|Adjustments to reconcile net loss to cash provided by (used in)
 operating activities: |  |                         |             |      |   |             |   |   |             |  
|Inventory reserve                                                                      |  |                         | 126,000     |      |   | 621,000     |   |   |            |  
|Accrued interest income                                                                |  |                         | (75,000     | )    |   | 120,000     |   |   | 44,000      |  
|Stock based compensation                                                               |  |                         | 2,989,000   |      |   | 2,157,000   |   |   | 1,558,000   |  
|Depreciation and amortization                                                          |  |                         | 540,000     |      |   | 533,000     |   |   | 2,435,000   |  
|Deferred rent expense                                                                  |  |                         | (22,000     | )    |   | (22,000     | ) |   | 188,000     |  
|Change in fair value of investments                                                    |  |                         | 338,000     |      |   | (338,000    | ) |   |            |  
|Bad debt reserve                                                                       |  |                         |            |      |   |            |   |   | 65,000      |  
|Changes in:                                                                            |  |                         |             |      |   |             |   |   |             |  
|Restricted cash                                                                        |  |                         | (230,000    | )    |   | 230,000     |   |   |            |  
|Accounts receivable                                                                    |  |                         | (5,370,000  | )    |   | 5,049,000   |   |   | (611,000    | )
|Notes and lease receivable                                                             |  |                         |             |      |   |             |   |   | 199,000     |  
|Unbilled receivables                                                                   |  |                         | 412,000     |      |   | 168,000     |   |   |            |  
|Inventory                                                                              |  |                         | 1,212,000   |      |   | (1,815,000  | ) |   | 2,428,000   |  
|Prepaid expenses and other assets                                                      |  |                         | 10,000      |      |   | (320,000    | ) |   | 105,000     |  
|Deferred costs                                                                         |  |                         |             |      |   |             |   |   | (3,442,000  | )
|Deferred revenue                                                                       |  |                         | 197,000     |      |   | 307,000     |   |   | 4,454,000   |  
|Accounts payable and accrued expenses                                                  |  |                         | (843,000    | )    |   | (369,000    | ) |   | 1,593,000   |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Net cash used in operating activities                                                  |  |                         | (4,891,000  | )    |   | (6,871,000  | ) |   | (3,595,000  | )
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Cash flows from investing activities:                                                  |  |                         |             |      |   |             |   |   |             |  
|Purchase of fixed assets                                                               |  |                         | (188,000    | )    |   | (358,000    | ) |   | (1,459,000  | )
|Business acquisition                                                                   |  |                         | (573,000    | )    |   | (518,000    | ) |   | (15,000,000 | )
|Purchase of investments                                                                |  |                         | (28,513,000 | )    |   | (59,408,000 | ) |   | (15,330,000 | )
|Maturities of investments                                                              |  |                         | 44,649,000  |      |   | 62,439,000  |   |   | 42,107,000  |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Net cash provided by investing activities                                              |  |                         | 15,375,000  |      |   | 2,155,000   |   |   | 10,318,000  |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Cash flows from financing activities:                                                  |  |                         |             |      |   |             |   |   |             |  
|Repayment of term loan                                                                 |  |                         | (19,000     | )    |   |            |   |   |            |  
|Proceeds from exercise of stock options                                                |  |                         | 1,377,000   |      |   | 2,000       |   |   | 3,000       |  
|Collection of officer loan                                                             |  |                         |            |      |   |            |   |   |            |  
|Borrowings on line of credit                                                           |  |                         |            |      |   | 12,900,000  |   |   |            |  
|Principal payments on line of credit                                                   |  |                         |            |      |   | (1,262,000  | ) |   | (11,638,000 | )
|Purchase of treasury shares                                                            |  |                         | (4,387,000  | )    |   |            |   |   | (99,000     | )
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Net cash (used in) provided by financing activities                                    |  |                         | (3,029,000  | )    |   | 11,640,000  |   |   | (11,734,000 | )
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Effect of foreign exchange rate changes on cash and cash equivalents                   |  |                         |            |      |   | (1,000      | ) |   | 21,000      |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                         | 7,455,000   |      |   | 6,923,000   |   |   | (4,990,000  | )
|Cash and cash equivalents - beginning of period                                        |  |                         | 5,103,000   |      |   | 12,558,000  |   |   | 19,481,000  |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Cash and cash equivalents - end of
 period                                             |  | $                       | 12,558,000  |      | $ | 19,481,000  |   | $ | 14,491,000  |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Supplemental disclosure of cash flow information:                                      |  |                         |             |      |   |             |   |   |             |  
|Cash paid for:                                                                         |  |                         |             |      |   |             |   |   |             |  
|Interest                                                                               |  | $                       |            |      | $ | 130,000     |   | $ | 56,000      |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Non-cash investing and financing activities include:                                   |  |                         |             |      |   |             |   |   |             |  
|Shares withheld pursuant to stock issuance                                             |  | $                       | 424,000     |      | $ | 65,000      |   | $ | 10,000      |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Unrealized (loss) gain on investments                                                  |  | $                       | (35,000     | )    | $ | (107,000    | ) | $ | 46,000      |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Accrual of contingent consideration and accrued expenses                               |  | $                       |            |      | $ | 110,000     |   | $ |            |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Acquisition:                                                                           |  |                         |             |      |   |             |   |   |             |  
|Fair value of assets acquired                                                          |  |                         |             |      | $ | 748,000     |   | $ | 20,746,000  |  
|Liabilities assumed                                                                    |  |                         |             |      |   | (104,000    |   |   | (5,746,000  | )
|Less: contingent consideration                                                         |  |                         |             |      |   | (110,000    | ) |   |            |  
|Less: cash acquired                                                                    |  |                         |             |      |   | (16,000     | ) |   |            |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  
|Net cash paid                                                                          |  |                         |             |      | $ | 518,000     |   | $ | 15,000,000  |  
|                                                                                       |  |                         |             |      |   |             |   |   |             |  

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

50

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I.D. SYSTEMS,
INC. 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2009 and 2010

NOTE 1 - THE COMPANY

I.D. Systems,
Inc. and its subsidiaries (the Company, we, our or us) develop, market
and sell wireless solutions for managing and securing high-value enterprise
assets. These assets include industrial vehicles, including forklifts, airport
ground support equipment, rental vehicles and transportation assets, such as
dry van trailers, refrigerated trailers, railcars and containers. The Companys
patented wireless asset management system addresses the needs of organizations
to control, track, monitor and analyze their assets. The Companys solutions
enable customers to achieve tangible economic benefits by making timely,
informed decisions that increase the security, productivity and efficiency of
their operations. The Company outsources its hardware manufacturing operations
to contract manufacturers.

On January 7,
2010, the Company entered into a Membership Interest Purchase Agreement (the Purchase
Agreement) with General Electric Capital Corporation (GECC) and GE Asset
Intelligence, LLC (GEAI), pursuant to which the Company acquired GEAIs
telematics business (the GEAI Business) through the purchase of 100% of the
membership interests of Asset Intelligence, LLC (AI), a newly formed, wholly
owned subsidiary of GEAI into which substantially all of the assets, including
intellectual property, and liabilities of the GEAI Business had been
transferred immediately prior to the closing. Effective with the closing of the
transaction, AI became a wholly owned subsidiary of the Company. See Note 10 to
the Consolidated Financial Statements.

Prior to the
AI acquisition, the Company operated in a single reportable segment, which
consisted of the historical operations of I.D. Systems (IDS). Subsequent
thereto, the Company has determined that it has two reportable segments
organized by product line: IDS and AI. The IDS operating segment includes the
Companys core wireless asset management systems operations: I.D. Systems,
Inc., I.D. Systems, GmbH, and Didbox Ltd. This core business develops, markets
and sells wireless solutions for managing and securing high-value enterprise
assets such as industrial trucks. The AI operating segment, which consists of
Asset Intelligence, LLC, provides data-driven telematics solutions for tracking
and managing supply chain assets such as trailers and containers.

I.D. Systems,
Inc. was incorporated in Delaware in 1993 and commenced operations in January
1994.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[A] |  | Principles of consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The
 consolidated financial statements include the accounts of I.D. Systems, Inc.
 (the Company) and its wholly owned subsidiaries Asset Intelligence LLC,
 (AI), I.D. Systems, GmbH (GmbH) and Didbox Ltd. (Didbox). All material
 intercompany balances and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|[B] |  | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The
 preparation of financial statements in conformity with accounting principles
 generally accepted in the United States of America (U.S. GAAP) requires
 management to make estimates and assumptions that affect the reported amounts
 of assets and liabilities and disclosure of contingent assets and liabilities
 at the date of the financial statements and the reported amounts of revenues
 and expenses during the reporting period. The Company continually evaluates
 estimates used in the preparation of the financial statements for
 reasonableness. The most significant estimates relate to stock-based
 compensation arrangements, acquisition accounting, contingent consideration,
 realization of deferred tax assets, the impairment of tangible and intangible
 assets, inventory reserves, bad debt and warranty reserves and deferred
 revenue and costs. Actual results could differ from those estimates.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|[C] |  | Cash and cash equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The Company
 considers all highly liquid debt instruments with an original maturity of
 three months or less when purchased to be cash equivalents unless they are
 legally or contractually restricted. The Companys cash and cash equivalent
 balances exceeded FDIC limits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

51

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[D] |  | Investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The
 Companys investments include debt securities, U.S. Treasury Notes,
 government and state agency bonds, corporate bonds, and mutual funds, which
 are classified as either available for sale, held to maturity or trading,
 depending on managements investment intentions relating to these securities.
 Available for sale securities are marked to market based on quoted market
 values of the securities, with the unrealized gain and (losses), reported as
 comprehensive income or (loss). Investments categorized as held to maturity
 are carried at amortized cost because the Company has both the intent and the
 ability to hold these investments until they mature. The Company has
 classified as short-term those securities that mature within one year, and
 all other securities are classified as long-term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The
 Companys investments at December 31, 2009 also included auction rate
 securities (ARS) and an auction rate securities right (ARSR). The Company
 had classified its ARS and ARSR investments as trading securities. Trading
 securities are carried at fair value, with unrealized holding gains and
 losses included in other income (expense) on the Companys consolidated
 statements of operations. The investment in ARS and ARSR were redeemed by
 July 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|[E] |  | Accounts receivable:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | Accounts
 receivable are recorded at the invoiced amount and do not bear interest.
 Amounts collected on trade accounts receivable are included in net cash
 provided by operating activities in the consolidated statements of cash
 flows. The Company maintains reserves against its accounts receivable for
 potential losses. Allowances for uncollectible accounts are estimated based
 on the Companys periodic review of accounts receivable balances. In
 establishing the required allowance, management considers our customers
 financial condition, the amount of receivables in dispute, and the current
 receivables aging and current payment patterns. Account balances are charged
 off against the allowance after all means of collection have been exhausted
 and the potential for recovery is considered remote. Accounts receivable are
 net of an allowance for doubtful accounts in the amount of $106,000 and
 $161,000 in 2009 and 2010, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|[F] |  | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The
 Companys product revenue is derived from: (i) sales of our industrial
 and rental fleet wireless asset management systems and services, which includes
 training and technical support; (ii) sale of our remote asset wireless asset
 management systems and spare parts sold to customers (for which title
 transfers on date of customer receipt) and from the related communication services
 under contracts that generally provide for service over periods ranging from
 one to five years; (iii) from post-contract maintenance and support
 agreements; and (iv) periodically, from leasing arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | Our
 industrial and rental fleet wireless asset management systems consists of
 on-asset hardware, communication infrastructure and software. Revenue derived
 from the sale of our industrial and rental fleet wireless asset management
 systems is allocated to each element based upon vendor specific objective
 evidence (VSOE) of the fair value of the element. VSOE of the fair value is
 based upon the price charged when the element is sold separately. Revenue is
 recognized as each element is earned based on the selling price of each
 element, and when there are no undelivered elements that are essential to the
 functionality of the delivered elements. The Companys system is typically
 implemented by the customer or a third party and, as a result, revenue is
 recognized when title and risk of loss passes to the customer, which usually
 is upon delivery of the system, persuasive evidence of an arrangement exists,
 sales price is fixed and determinable, collectability is reasonably assured
 and contractual obligations have been satisfied. In some instances, we are
 also responsible for providing installation services. The additional
 installation services, which could be performed by third parties, are
 considered another element in a multi-element deliverable and revenue for
 installation services is recognized at the time the installation is provided.
 Training and technical support revenue are recognized at time of performance.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The Company
 recognizes revenues from the sale of remote asset wireless management systems
 and spare parts when persuasive evidence of an arrangement exists, delivery
 has occurred, the price is fixed or determinable, and collectability is
 reasonably assured. These criteria include requirements that the delivery of
 future products or services under the arrangement is not required for the
 delivered items to serve their intended purpose. The Company has determined
 that the revenue derived from the sale of remote asset wireless management
 systems does not have stand alone value to the customer separate from the
 communication services provided and therefore the arrangements constitute a
 single unit of accounting. Under these provisions, all of the Companys
 billings for equipment and the related cost are deferred, recorded, and
 classified as a current and long-term liability and a current and long-term
 asset, respectively. Deferred revenue and cost are recognized over the
 service contract life, beginning at the time that a customer acknowledges
 acceptance of the equipment and service. The customer service contracts
 typically range from one to five years.                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The service
 revenue for our remote asset monitoring equipment relates to charges for
 monthly messaging usage and value-added features charges. The usage fee is a
 monthly fixed charge based on the expected utilization according to the rate
 plan chosen by the customer. Service revenue generally commences upon
 equipment installation and customer acceptance, and is recognized over the
 period such services are provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | Spare parts sales are reflected in product revenues
 and recognized on the date of customer receipt of the part. Revenue from
 remote asset monitoring equipment activation fees is deferred and amortized
 over the life of the contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The Company
 also derives revenue under leasing arrangements of remote asset monitoring
 equipment. Such arrangements provide for monthly payments covering the system
 sale, maintenance, support and interest. These arrangements meet the criteria
 to be accounted for as sales-type leases. Accordingly, an asset is
 established for the sales-type lease receivable and revenue is deferred and
 recognized over the service contract as described above. Maintenance revenues
 and interest income are recognized monthly over the lease term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  | The Company
 also enters into post-contract maintenance and support agreements for its
 wireless asset management systems. Revenue is recognized over the service
 period and the cost of providing these services is expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

52

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|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[G] |  | Inventory:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Inventory,
 which primarily consists of finished goods and components used in the
 Companys products, is stated at the lower of cost or market using the
 first-in first-out (FIFO) method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Inventory
 valuation reserves are established in order to report inventories at the
 lower of cost or market value in the consolidated balance sheet. The
 determination of inventory valuation reserves requires management to make
 estimates and judgments on the future salability of inventories. Valuation
 reserves for obsolete and slow-moving inventory are estimated by comparing
 the inventory levels to historical usage rates and both future sales
 forecasts and production requirements. Other factors that management
 considers in determining these reserves include whether inventory parts meet
 current specifications or can be used as a service part.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[H] |  | Fixed assets and depreciation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Fixed assets
 are recorded at cost and depreciated using the straight-line method over the
 estimated useful lives of the assets, which range from three to ten years.
 Leasehold improvements are amortized using the straight-line method over the
 terms of the respective leases, or their estimated useful lives, whichever is
 shorter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[I] |  | Long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Long-lived
 assets are reviewed for impairment whenever events or changes in
 circumstances indicate that the carrying amount of an asset may not be
 recoverable. Recoverability of assets to be held and used is measured by a
 comparison of the carrying amount of the assets to the future undiscounted
 net cash flows expected to be generated by the asset. If such assets are
 considered to be impaired, the impairment to be recognized is measured by the
 amount by which the carrying amount of the assets exceeds the fair value of
 the assets and would be charged to earnings. For the years ended December 31,
 2008, 2009 and 2010, the Company has not incurred an impairment charge.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[J] |  | Acquisitions, goodwill and other intangible assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | In December
 2007, the FASB issued new accounting standards establishing principles and
 requirements for how an acquirer recognizes and measures in its financial
 statements the identifiable assets acquired, including goodwill, the
 liabilities assumed and any noncontrolling interest in the acquiree. This
 accounting standard was effective for business combinations for which the
 acquisition date is on or after January 1, 2009. Accordingly, all business
 combinations that we complete are accounted for under this new accounting
 standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Goodwill
 represents costs in excess of fair values assigned to the underlying net
 assets of acquired businesses. Goodwill and intangible assets deemed to have
 indefinite lives are not amortized. Intangible assets other than goodwill are
 amortized over their useful lives unless the lives are determined to be
 indefinite. Intangible assets are carried at cost, less accumulated
 amortization. Intangible assets consist of trademarks and trade name,
 patents, customer relationships and other intangible assets. The Company
 tests goodwill and other intangible assets annually, or when a triggering
 event occurs between annual impairment tests, to determine if impairment
 exists and if the use of indefinite lives is currently applicable. At
 December 31, 2009 and 2010, the Company determined that no impairment existed
 to the goodwill, customer relationships, trademark and trade name, patents
 and other intangible assets. The Company also determined that the use of
 indefinite lives for the customer list and trademark and trade name remains
 applicable at December 31, 2009 and 2010 and the Company expects to derive
 future benefits from these intangible assets.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[K] |  | Product warranties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | The
 Companys AI segment provides a one-year warranty on its products. Estimated
 future warranty costs are accrued in the period that the related revenue is
 recognized. These estimates are derived from historical data and trends of
 product reliability and costs of repairing and replacing defective products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[L] |  | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Research and
 development costs are charged to expense as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[M] |  | Patent costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | Costs
 incurred in connection with acquiring patent rights are charged to expense as
 incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[N] |  | Benefit plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  | The Company
 maintains a retirement plan under Section 401(k) of the Internal Revenue
 Code, which covers all eligible employees. All employees with U.S. source
 income are eligible to participate in the plan immediately upon employment.
 The Company did not make any contributions to the plan during the years ended
 December 31, 2008, 2009 and 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

53

---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[O] |  | Rent expense:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  | Expense
 related to the Companys facility lease is recorded on a straight-line basis
 over the lease term. The difference between rent expense incurred and the
 amounts required to be paid in accordance with the lease term is recorded as
 deferred rent and is amortized over the lease term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[P] |  | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  | The Company
 accounts for stock-based employee compensation for all share-based payments,
 including grants of stock options as an operating expense, based on their
 fair values on grant date. The Company recorded stock-based compensation
 expense of $2,989,000, $2,157,000 and $1,558,000 for the years ended December
 31, 2008, 2009 and 2010, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  | The Company
 estimates the fair value of share-based payment awards on the grant date
 using an option pricing model. The value of the portion of the award that is
 ultimately expected to vest is recognized as expense over the requisite
 service period in the Companys consolidated statement of operations. The
 Company estimates forfeitures at the time of grant in order to estimate the
 amount of share- based awards that will ultimately vest. The estimate is
 based on the Companys historical rates of forfeitures. Estimated forfeitures
 are revised, if necessary, in subsequent periods if actual forfeitures differ
 from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[Q] |  | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  | The Company
 uses the asset and liability method of accounting for deferred income taxes.
 Deferred income taxes are measured by applying enacted statutory rates to net
 operating loss carryforwards and to the differences between the financial
 reporting and tax bases of assets and liabilities. Deferred tax assets are
 reduced, if necessary, by a valuation allowance if it is more likely than not
 that some portion or all of the deferred tax assets will not be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  | Effective
 January 1, 2007, the Company adopted authoritative guidance that clarifies
 the uncertainty in income taxes recognized in the financial statements by
 prescribing a recognition threshold and measurement attribute for financial
 statement recognition and measurement of a tax position taken or expected to
 be taken in a tax return. As required by the guidance, the Company applied
 the more-likely-than-not recognition threshold to all tax positions,
 commencing at the adoption date, which resulted in no unrecognized tax
 benefits as of such date. Additionally, there have been no unrecognized tax
 benefits subsequent to adoption. Accordingly, the adoption of the guidance
 had no effect on the Companys financial statements. The Company has opted
 to classify interest and penalties that would accrue according to the provisions
 of relevant tax law as selling, general, and administrative expenses, in the
 consolidated statement of operations. For the years ended December 31, 2008,
 2009 and 2010, there was no such interest or penalty.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |  | The Company
 files federal income tax returns and separate income tax returns in various
 states. For federal and certain states, the 2007 through 2010 tax years
 remain open for examination by the tax authorities under the normal
 three-year statute of limitations. For certain other states, the 2006 through
 2010 tax years remain open for examination by the tax authorities under a
 four-year statute of limitations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

54

---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[R] |  | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  | The carrying
 amounts of cash equivalents, accounts receivable, and investments in
 securities are carried at fair value and accounts payable, line of credit,
 and other liabilities approximate their fair values due to the short period
 to maturity of these instruments. At December 31, 2009, the fair value of the
 ARS was determined utilizing a discounted cash flow approach and market
 evidence with respect to the ARS collateral, ratings and insurance to assess
 default risk, credit spread risk and downgrade risk.
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|[S] |  | Advertising and marketing expense:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |  | Advertising
 and marketing costs are expensed as incurred. Advertising and marketing
 expense for the years ended December 31, 2008, 2009 and 2010 amounted to
 $379,000, $271,000 and $341,000, respectively.                                                                                                                                                                                                                                                                                                                          
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|[T] |  | Recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

55

---



In
June 2009, the Financial Accounting Standards Board (the FASB) issued a
standard which provides guidance to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and
cash flows; and a transferors continuing involvement, if any, in transferred
financial assets. The standard is effective as of the beginning of each
reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. The adoption of
this guidance did not have a material impact on the Companys consolidated
financial position or results of operations.

In
October 2009, the FASB issued a standard which establishes the accounting
and reporting guidance for arrangements including multiple revenue-generating
activities. This standard provides amendments to the criteria for separating
deliverables, measuring and allocating arrangement consideration to one or more
units of accounting. The amendments in this standard also establish a selling
price hierarchy for determining the selling price of a deliverable.
Significantly enhanced disclosures are also required to provide information
about a vendors multiple-deliverable revenue arrangements, including
information about the nature and terms, significant deliverables, and its
performance within arrangements. The amendments also require providing
information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in this standard are
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early
application is permitted. The adoption of this guidance is not expected to have
a material impact on the Companys consolidated results of operations or
financial position.

In
October 2009, the FASB issued a standard which changes the accounting
model for revenue arrangements that include both tangible products and software
elements that are essential to the functionality and scopes these products
out of current software revenue guidance. The new guidance will include factors
to help companies determine what software elements are considered essential to
the functionality. The amendments will now subject software-enabled products
to other revenue guidance and disclosure requirements, such as guidance
surrounding revenue arrangements with multiple deliverables. The amendments in
this standard are effective prospectively for revenue arrangements entered into
or materially modified in the fiscal years beginning on or after June 15,
2010. Early application is permitted. The adoption of this guidance is not
expected to have a material impact on the Companys consolidated results of
operations or financial position.

In
January 2010, the FASB issued additional guidance for improving
disclosures about fair value measurement. Under this guidance, two new
disclosures are required: (i) significant transfers in and out of Level 1
and 2 measurements and the reasons for the transfers and (ii) a gross
presentation of activity within the Level 3 rollforward. The guidance is
effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the rollforward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010. The adoption of this guidance did not have and is not
expected to have a material impact on the Companys consolidated results of
operations or financial position.

In December
2010, the FASB issued an amendment which Affects entities that have recognized
goodwill and have one or more reporting units whose carrying amounts for the
purposes of Step 1 of the goodwill impairment test is zero or negative. The
amendment modifies Step 1 so that for those reporting units, the entity is
required to perform Step 2 of the goodwill impairment test if it is more likely
than not that a goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity should consider
whether there are adverse qualitative factors, including the examples provided
in ASC paragraph 350-20-35-30, in determining whether an interim goodwill
impairment test between annual test dates is necessary. The standard allows an
entity to use either the equity or enterprise valuation premise to determine
the carrying amount of a reporting unit. This standard is effective for the
Company for fiscal years, and interim periods within those years, beginning
after December 15, 2010. The Company is currently evaluating the impact that
the adoption of this standard will have on its consolidated financial
statements.

In December
2010, the FASB issued an amendment which specifies that if a public entity
presents comparative financial statements, the entity should disclose revenue
and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendment also expands the
supplemental pro forma disclosures under Topic 805 to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. The amendment is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010.

56

---



NOTE 3  INVESTMENTS AND FAIR VALUE
MEASUREMENTS

At December
31, 2010, the Companys investments include U.S. Treasury Notes, government and
state agency bonds, mutual funds, corporate bonds and commercial paper, which
are classified as either available for sale, held to maturity or trading,
depending on managements investment intentions relating to these securities.
Available for sale securities are marked-to-market based on quoted market
values of the securities, with the unrealized gain and (losses) reported
as comprehensive income or (loss). For the years ended December 31, 2008, 2009
and 2010, the Company reported unrealized gain (loss) of $35,000, $(107,000)
and $46,000, respectively, on available for sale securities in comprehensive
loss. Investments categorized as held to maturity are carried at amortized cost
because the Company has both the intent and the ability to hold these investments
until they mature. Realized gains and losses from the sale of available for
sale securities are determined on a specific-identification basis. During
September 2010, the Company transferred approximately $10.3 million
of debt securities classified as held to maturity to available for sale. The
Company has classified as short-term those securities that mature within one
year, and all other securities are classified as long-term.

The following
table summarizes the estimated fair value of investment securities designated
as available for sale classified by the contractual maturity date of the
security as of December 31, 2010:

|                                  |  |            |            | 
|--------------------------------- |  | ---------- | ---------- | 
|                                  |  | Fair
Value |           
|                                  |  |            |           
|Due within
 one year              |  | $          | 2,078,000  | 
|Due one year
 through three years |  |            | 9,364,000  | 
|Due after
 three years            |  |            |           | 
|                                  |  |            |            | 
|                                  |  |            |            | 
|                                  |  | $          | 11,442,000 | 
|                                  |  |            |            | 

At December
31, 2009, the Companys investments also included auction-rate securities
(ARS) and an auction-rate securities right (ARSR), each as described below.
The investments in ARS and ARSR were redeemed by July 2010.

The Company
had classified its ARS investments and ARSR as trading securities. Trading
securities are carried at fair value, with unrealized holding gains and losses
included in other income (expense) on the Companys consolidated
statements of operations.

At
December 31, 2009 and 2010, the Company held approximately
$19.4 million and $-0- fair value in ARS and ARSR, respectively. These ARS
represented interests in collateralized pools of student loan receivables
issued by agencies established by counties, cities, states and other municipal
entities within the United States. Liquidity for these ARS is typically
provided by an auction process that resets the applicable interest rate at
pre-determined intervals. Starting in February 2008 and continuing through
2010, these securities failed to sell at auction. These failed auctions
represented liquidity risk exposure and are not defaults or credit events. As a
holder of the securities, the Company continued to receive interest on the ARS
until they were sold or redeemed.

57

---



The Company
purchased all of the ARS it held from UBS AG (UBS). In October 2008, the
Company received a non-transferable offer (the Offer) from UBS for a put
right (the ARSR) permitting the Company to sell to UBS at par value all ARS
previously purchased from UBS at a future date (any time during a two-year
period beginning June 30, 2010). The Offer also included a commitment to
loan the Company 75% of the UBS-determined value of the ARS at any time until
the put is exercised at a variable interest rate equal to the lesser of:
(i) the applicable reference rate plus a spread set forth in the
applicable credit agreement and (ii) the then-applicable weighted-average
interest or dividend rate paid to the Company by the issuer of the ARS that is
pledged to UBS as collateral. In November 2008, the Company accepted the
Offer. In exchange for the Offer, the Company provided UBS with a general
release of claims (other than certain consequential damages claims) concerning
our ARS and granted UBS the right to purchase the Companys ARS at any time for
full par value. In June 2010, the Company exercised its right under the
ARSR to put back the ARS to UBS. During June and July 2010, UBS
repurchased the outstanding ARS at par value.

The Companys
right under the ARSR was in substance a put option with the strike price equal
to the par value of the ARS which was recorded as an asset, measured at fair
value with the resultant gain (loss) recognized in earnings. The Company
classified the ARS as trading securities. The Company recognized the following
gain or (loss) in the consolidated statement of operations for the years ended
December 31, 2009 and 2010 from the change in the fair value of these
instruments:

|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 
|--------------------------------- |  | ---------------------------- | ---------- | ------------------------ | - | -------------------- | - | -------------------------------- | -------- | - | - | ---------- | 
|Year ended December 31, 2010      |  | Fair Value atJanuary 1, 2010 |            | NetPurchases(Maturities) |   | UnrealizedGain(Loss) |   | Fair Value atDecember 31, 
 2010 |         
|                                  |  |                              |            |                          |   |                      |   |                                  |         
|Auction Rate
 Securities          |  | $                            | 17,876,000 |                          | $ | (17,876,000          | ) | $                                |         |   | $ |           | 
|Auction Rate
 Securities  Rights |  |                              | 1,499,000  |                          |   | (1,499,000           | ) |                                  |         |   |   |           | 
|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 
|                                  |  | $                            | 19,375,000 |                          | $ | (19,375,000          | ) | $                                |         |   | $ |           | 
|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 
|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 
|Year ended December
 31, 2009     |  | Fair Value atJanuary 1, 2009 |            | NetPurchases(Maturities) |   | UnrealizedGain(Loss) |   | Fair Value atDecember 31,
 2009  |         
|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 
|Auction Rate
 Securities          |  | $                            | 18,117,000 |                          | $ | (1,050,000           | ) | $                                | 809,000  |   | $ | 17,876,000 | 
|Auction Rate
 Securities  Rights |  |                              | 1,970,000  |                          |   |                     |   |                                  | (471,000 | ) |   | 1,499,000  | 
|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 
|                                  |  | $                            | 20,087,000 |                          | $ | (1,050,000           | ) | $                                | 338,000  |   | $ | 19,375,000 | 
|                                  |  |                              |            |                          |   |                      |   |                                  |          |   |   |            | 

The fair value
of the ARSR was based on an approach in which the present value of all expected
future cash flows was subtracted from the current fair market value of the
security and the resultant value was calculated as a future value at an
interest rate reflective of counterparty risk.

58

---



The cost,
gross unrealized gains (losses) and fair value of available for sale, held to
maturity and trading to maturity securities by major security type at December
31, 2009 and 2010 were as follows:

|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|------------------------------------- |  | ---- | ---------- | ---------------- | - | ---------------- |  | ----------- | ------- | - | - | ---------- | 
|December 31, 2010                     |  | Cost |            | Unrealized
 Gain |   | Unrealized
 Loss |  | Fair
 Value |        
|                                      |  |      |            |                  |   |                  |  |             |        
|Investments  short term              |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Available for sale                    |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Government agency bonds               |  | $    | 521,000    |                  | $ |                 |  | $           |        |   | $ | 521,000    | 
|Mutual funds                          |  |      | 2,515,000  |                  |   |                 |  |             | (28,000 | ) |   | 2,487,000  | 
|Corporate bonds and commercial paper  |  |      | 1,549,000  |                  |   | 8,000            |  |             |        |   |   | 1,557,000  | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Total available for sale  short term |  |      | 4,585,000  |                  |   | 8,000            |  |             | (28,000 | ) |   | 4,565,000  | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Investments  long term               |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Available for sale                    |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|U.S. Treasury Notes                   |  |      | 5,079,000  |                  |   |                  |  |             | (10,000 | ) |   | 5,069,000  | 
|Government agency bonds               |  |      | 2,232,000  |                  |   |                  |  |             |         |   |   | 2,232,000  | 
|Corporate bonds and commercial paper  |  |      | 2,048,000  |                  |   | 24,000           |  |             | (9,000  | ) |   | 2,063,000  | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Total available for sale  long term  |  |      | 9,359,000  |                  |   | 24,000           |  |             | (19,000 | ) |   | 9,364,000  | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 
|Total investments                     |  | $    | 13,944,000 |                  | $ | 32,000           |  | $           | (47,000 | ) | $ | 13,929,000 | 
|                                      |  |      |            |                  |   |                  |  |             |         |   |   |            | 

59

---



|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|-------------------------------- |  | ---- | ---------- | ---------------- | - | ---------------- |  | ----------- | ---------- | - | - | ---------- | 
|December 31, 2009                |  | Cost |            | Unrealized
 Gain |   | Unrealized
 Loss |  | Fair
 Value |           
|                                 |  |      |            |                  |   |                  |  |             |           
|Investments  short term         |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Available for sale               |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Government agency bonds          |  | $    | 10,848,000 |                  | $ |                 |  | $           | (61,000    | ) | $ | 10,787,000 | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Total available for sale         |  |      | 10,848,000 |                  |   |                 |  |             | (61,000    | ) |   | 10,787,000 | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Held to maturity securities      |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|US Treasury Notes                |  |      | 763,000    |                  |   |                 |  |             |           |   |   | 763,000    | 
|Government agency bonds          |  |      | 1,949,00   |                  |   |                  |  |             |            |   |   | 1,949,000  | 
|Corporate bonds                  |  |      | 1,035,000  |                  |   |                  |  |             |            |   |   | 1,035,000  | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Total held to maturity           |  |      | 3,747,000  |                  |   |                  |  |             |            |   |   | 3,747,000  | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Trading securities               |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Auction rate securities          |  |      | 19,375,000 |                  |   |                  |  |             | (1,499,000 | ) |   | 17,876,000 | 
|Auction rate securities  rights |  |      |            |                  |   | 1,499,000        |  |             |            |   |   | 1,499,000  | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Total trading securities         |  |      | 19,375,000 |                  |   | 1,499,000        |  |             | (1,499,000 | ) |   | 19,375,000 | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Total investments  short term   |  |      | 33,970,000 |                  |   | 1,499,000        |  |             | (1,560,000 | ) |   | 33,909,000 | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Investments  long term          |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Held to maturity securities      |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|US Treasury Notes                |  |      | 770,000    |                  |   |                  |  |             |            |   |   | 770,000    | 
|Government agency bonds          |  |      | 2,349,000  |                  |   |                 |  |             |           |   |   | 2,349,000  | 
|Corporate bonds                  |  |      | 3,633,000  |                  |   |                 |  |             |           |   |   | 3,633,000  | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Total investments  long term    |  |      | 6,752,00   |                  |   |                 |  |             |           |   |   | 6,752,000  | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 
|Total investments                |  | $    | 40,722,000 |                  | $ | 1,499,000        |  | $           | (1,560,000 | ) | $ | 40,661,000 | 
|                                 |  |      |            |                  |   |                  |  |             |            |   |   |            | 

The Company utilizes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels. The
following is a brief description of those levels:

| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | § | Level 1:
 Unadjusted quoted prices in active markets for identical assets or
 liabilities.                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                             
| | § | Level 2: Inputs other than quoted prices that are observable for the
 asset or liability, either directly or indirectly. These include quoted
 prices for similar assets or liabilities in active markets and quoted prices
 for identical or similar assets or liabilities in markets that are not
 active.
| |   |                                                                                                                                                                                                                                                                                                             
| | § | Level 3:
 Unobservable inputs that reflect the reporting entitys own assumptions.                                                                                                                                                                                                                          

At December
31, 2010, the Companys investments described above are classified as Level 1
for fair value measurement.

The table
below includes a roll forward of the Companys investments in ARS and ARSR from
January 1, 2010 to December 31, 2010:

|                               |  |   |             |  
|------------------------------ |  | - | ----------- | -
|Fair value,
 January 1, 2010   |  | $ | 19,375,000  |  
|Net
 redemptions               |  |   | (19,375,000 | )
|                               |  |   |             |  
|Fair
 value, December 31, 2010 |  | $ |            |  
|                               |  |   |             |  

60

---



NOTE 4  REVENUE RECOGNITION

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
 Companys product revenue is derived: (i) from sales of our industrial
 and rental fleet wireless asset management systems, which includes training
 and technical support; (ii) from remote asset wireless asset management
 systems and spare parts sold to customers (for which title transfers on date
 of customer receipt) and from the related communication services under contracts
 that generally provide for service over periods ranging from one to five
 years; (iii) from post-contract maintenance and support agreements; and
 (iv) periodically, from leasing arrangements.                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Company
 has determined that the revenue derived from the sale of remote asset
 wireless management systems does not have stand alone value to the customer
 separate from the communication services provided and the arrangements
 constitute a single unit of accounting. Under the applicable accounting
 guidance, all of the Companys billings for equipment and the related cost
 are deferred, recorded, and classified as a current and long-term liability
 and a current and long-term asset, respectively. Deferred revenue and cost
 are recognized over the service contract life, beginning at the time that a
 customer acknowledges acceptance of the equipment and service. The customer
 service contracts typically range from one to five years. During the year
 ended December 31, 2010, the Company amortized deferred equipment
 revenue of $696,000.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The Company
 also enters into post-contract maintenance and support agreements for its
 wireless asset management systems. Revenue is recognized over the service
 period and the cost of providing these services is expensed as incurred.
 Deferred revenue also includes prepayment of extended maintenance and support
 contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Revenue from
 activation fees are deferred and amortized over the life of the contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Deferred
 revenue as of December 31, 2009 and December 31, 2010 consists of
 the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                    |  |              |         |      |   |           | 
|--------------------------------------------------- |  | ------------ | ------- | ---- | - | --------- | 
|                                                    |  | December 31, |        
|                                                    |  | 2009         |         | 2010 |  
|                                                    |  |              |         |      |  
|Deferred activation fees                            |  | $            |        |      | $ | 96,000    | 
|Deferred industrial equipment installation
 revenue |  |              |         |      |   | 367,000   | 
|Deferred maintenance revenue                        |  |              | 962,000 |      |   | 798,000   | 
|Deferred remote asset management product
 revenue   |  |              |        |      |   | 5,539,000 | 
|                                                    |  |              |         |      |   |           | 
|                                                    |  |              | 962,000 |      |   | 6,800,000 | 
|Less: Current portion                               |  |              | 501,000 |      |   | 2,186,000 | 
|                                                    |  |              |         |      |   |           | 
|                                                    |  |              |         |      |   |           | 
|Deferred revenue  less current portion             |  | $            | 461,000 |      | $ | 4,614,000 | 
|                                                    |  |              |         |      |   |           | 

| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales taxes
 collected from customers and remitted to governmental authorities are
 accounted for on a net basis and therefore are excluded from revenues in the
 consolidated statements of operations.

NOTE 5  NOTE RECEIVABLE AND SALES-TYPE LEASE
RECEIVABLE

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------
| | [A]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Note receivable:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                 
| | Notes
 receivable of $330,000 at December 31, 2010 relate to product financing
 arrangements that exceed one year and bear interest at approximately 8%.
 Interest is recognized over the life of the notes. The notes receivable are
 collateralized by the equipment being financed. The Company has not sold and
 does not intend to sell these receivables. Amounts collected on the notes
 receivable are included in net cash provided by operating activities in the
 consolidated statements of cash flows. Unearned interest income is amortized
 to interest income over the life of the notes using the effective-interest
 method. The revenue derived from the sale of monitoring equipment and the
 related costs are deferred (See Notes 4 and 6 to the Consolidated Financial
 Statements). Deferred revenue and cost are recognized over the service
 contract life, beginning at the time that a customer acknowledges acceptance
 of the equipment and service.

|                                         |  |   |         | 
|---------------------------------------- |  | - | ------- | 
|Notes
 receivable                        |  | $ | 330,000 | 
|Less:
 Current portion                   |  |   | 137,000 | 
|                                         |  |   |         | 
|Notes
 receivable - less current portion |  | $ | 193,000 | 
|                                         |  |   |         | 

61

---



| |                                                                                                                                                                                                          |                             
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------
| | [B]                                                                                                                                                                                                      | Sales-type lease receivable:
| |                                                                                                                                                                                                          |                             
| | Present
 value of net investment in sales-type lease of $862,000 is for a five-year
 lease of the Companys product and is reflected net of unearned income of
 approximately $132,000 discounted at 8%.
| |                                                                                                                                                                                                          |                             
| | Scheduled
 maturities of minimum lease payments outstanding as of December 31, 2010
 are as follows:                                                                                                    

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Year ending
 December 31: |  |   |         | 
|                          |  |   |         | 
|2011                      |  | $ | 216,000 | 
|2012                      |  |   | 234,000 | 
|2013                      |  |   | 253,000 | 
|2014                      |  |   | 159,000 | 
|2015                      |  |   |        | 
|                          |  |   |         | 
|                          |  |   |         | 
|Total                     |  | $ | 862,000 | 
|                          |  |   |         | 

NOTE 6  DEFERRED COSTS

During 2009,
the Company entered into a contract with a customer pursuant to which the
Companys rental fleet management system will be implemented on a portion
of the customers fleet of vehicles. The term of the agreement is for five
years. The customer is entitled to terminate the contract after 22 months subject
to a performance clause and early termination fees. The Company will be entitled
to issue sixty monthly invoices of up to $57,000 per month based on the number
of active vehicle management systems installed in the customers fleet of
vehicles. Costs directly attributable to this contract, consisting principally
of engineering and manufacturing costs, are being deferred until implementation
of the system is completed. The deferred costs will be charged to cost of
revenue in accordance with the cost recovery method, pursuant to which the
deferred contract costs will be reduced in each period by an amount equal to
the revenue recognized until all the capitalized costs are recovered, at which
time the Company will recognize a gross profit, if any. During 2010, the
Company capitalized $783,000 of such contract costs and expects to incur
additional costs until the installation is complete. As of December 31,
2009, the Company deferred $63,000 of such contract costs, which were included
in prepaid expenses and other current assets. The Company amortized $152,000
of such costs for the year ended December 31, 2010.

Deferred costs
at December 31, 2010 consists of the following:

|                                       |  |   |           | 
|-------------------------------------- |  | - | --------- | 
|Deferred
 contract costs               |  | $ | 694,000   | 
|Deferred
 product costs (see Note 4)   |  |   | 3,443,000 | 
|                                       |  |   |           | 
|                                       |  |   | 4,137,000 | 
|Less:
 Current portion                 |  |   | 1,159,000 | 
|                                       |  |   |           | 
|                                       |  |   |           | 
|Deferred
 costs  less current portion |  | $ | 2,978,000 | 
|                                       |  |   |           | 

The Company
will continue to evaluate the realizability of the carrying amount of the
deferred contract costs on a quarterly basis. To the extent the carrying value
of the deferred contract costs exceed the contract revenue, an impairment loss
will be recognized.

NOTE 7 - INVENTORIES

Inventories as
of December 31, 2009 and 2010 consist of the following:

|                          |  |              |           |      |   |           |  
|------------------------- |  | ------------ | --------- | ---- | - | --------- | -
|                          |  | December 31, |          
|                          |  | 2009         |           | 2010 |  
|Components                |  | $            | 898,000   |      | $ | 4,282,000 |  
|Finished
 goods           |  |              | 4,519,000 |      |   | 3,885,000 |  
|                          |  |              |           |      |   |           |  
|                          |  |              | 5,417,000 |      |   | 8,167,000 |  
|Less:
 Inventory reserves |  |              | (930,000  | )    |   | (872,000  | )
|                          |  |              |           |      |   |           |  
|                          |  |              |           |      |   |           |  
|                          |  | $            | 4,487,000 |      | $ | 7,295,000 |  
|                          |  |              |           |      |   |           |  

62

---



NOTE 8 - FIXED ASSETS

Fixed assets
are stated at cost, less accumulated depreciation and amortization, and at
December 31, 2009 and 2010, are summarized as follows:

|                                           |  |              |            |      |   |            |  
|------------------------------------------ |  | ------------ | ---------- | ---- | - | ---------- | -
|                                           |  | December 31, |           
|                                           |  | 2009         |            | 2010 |  
|Equipment                                  |  | $            | 1,011,000  |      | $ | 1,026,000  |  
|Computer
 software                         |  |              | 414,000    |      |   | 2,982,000  |  
|Computer
 hardware                         |  |              | 774,000    |      |   | 1,751,000  |  
|Furniture
 and fixtures                    |  |              | 184,000    |      |   | 329,000    |  
|Automobiles                                |  |              | 80,000     |      |   | 47,000     |  
|Leasehold
 improvements                    |  |              | 514,000    |      |   | 246,000    |  
|                                           |  |              |            |      |   |            |  
|                                           |  |              |            |      |   |            |  
|                                           |  |              | 2,977,000  |      |   | 6,381,000  |  
|Accumulated
 depreciation and amortization |  |              | (2,060,000 | )    |   | (2,528,000 | )
|                                           |  |              |            |      |   |            |  
|                                           |  |              |            |      |   |            |  
|                                           |  | $            | 917,000    |      | $ | 3,853,000  |  
|                                           |  |              |            |      |   |            |  

Depreciation
expense was $540,000, $530,000 and $1,265,000 for the years ended December 31,
2008, 2009 and 2010, respectively. This includes
amortization of costs associated with computer software and website development
for the years ended December 31, 2008, 2009 and 2010 of $132,000 $121,000
and $581,000, respectively.

The Company
capitalizes in fixed assets the costs of software development and website
development. Specifically, the assets comprise an implementation of Oracle
Enterprise Resource Planning (ERP) software, enhancements to the Veriwise ® systems, and a customer interface
website (which is the primary tool used to provide data to our customers). The
website employs updated web architecture and improved functionality and
features, including, but not limited to, customization at the customer level,
enhanced security features, custom virtual electronic geofencing of landmarks,
global positioning system (GPS) based remote mileage reporting, and richer
mapping capabilities. The Company capitalized the costs incurred during the
development and enhancement stages of the software and website development.
Costs incurred during the planning and post-implementation/operation stages
of development were expensed. The Company capitalized $-0- and $868,000 for
website enhancements for the years ended December 31, 2009 and 2010,
respectively.

NOTE 9  ACQUISITIONS, GOODWILL AND OTHER
INTANGIBLE ASSETS

On
October 19, 2009, the Company acquired Didbox Ltd. (Didbox), a privately
held manufacturer and marketer of vehicle operator identification systems based
in the United Kingdom (UK). The transaction was valued at approximately
$660,000 and was structured with $534,000 paid up front in cash and contingent
consideration of $110,000 due in 12 months based upon achievement of certain
revenue and operating profit targets. The Company originally recorded $110,000
of contingent consideration based on the expected revenue and operating profits
of Didbox during the measurement period applicable to the contingent
consideration. The contingent consideration was reversed during the third
quarter of 2010, as the Company did not expect Didbox to meet the revenue and
operating profit targets. The reversal of $110,000 of contingent consideration
is included in other income in the consolidated statement of operations. The
Company incurred acquisition-related expenses of approximately $43,000, which
were included in selling, general and administrative expenses in the
consolidated statement of operations during the year ended December 31,
2009. The Didbox business complements the Companys existing businesses by
allowing access to the original equipment manufacturer (OEM) dealer
network in the UK, and offers the ability to add the I.D. Systems solution set
to its product line. In addition, the acquisition is expected to provide the
Company with access to a broader base of customers in Europe.

63

---



The Company
has accounted for the Didbox transaction under the acquisition method of
accounting and recorded the assets and liabilities of the acquired business at
their estimated fair values at the date of acquisition. The excess of the
purchase price over the estimated fair values of the net assets acquired was
recorded as goodwill. The goodwill is not expected to be deductible for tax
purposes. The allocation of the Didbox purchase price consists of the
following:

|                               |  |   |          |  
|------------------------------ |  | - | -------- | -
|Current
 assets                |  | $ | 93,000   |  
|Other assets                   |  |   | 36,000   |  
|Current
 liabilities           |  |   | (104,000 | )
|Goodwill                       |  |   | 419,000  |  
|Trademarks
 and tradenames     |  |   | 61,000   |  
|Customer
 list                 |  |   | 56,000   |  
|Other
 intangibles             |  |   | 83,000   |  
|                               |  |   |          |  
|                               |  |   |          |  
|Fair value
 of assets acquired |  | $ | 644,000  |  
|                               |  |   |          |  

The results of
operations of Didbox have been included in the consolidated statement of
operations as of the effective date of the acquisition. Pro forma results of
operations have not been presented because the effects of the acquisition were
not material.

On
January 7, 2010, the Company entered into a Membership Interest Purchase
Agreement (the Purchase Agreement) with General Electric Capital Corporation
(GECC) and GE Asset Intelligence, LLC (GEAI), pursuant to which the Company
acquired GEAIs telematics business (the GEAI Business) through the purchase
of 100% of the membership interests of Asset Intelligence, LLC (AI), a newly
formed, wholly owned subsidiary of GEAI into which substantially all of the
assets, including intellectual property, and liabilities of the GEAI Business
had been transferred immediately prior to the closing. Effective with the
closing of the transaction, AI became a wholly owned subsidiary of the Company.
In connection with the transaction, AI offered employment to all of the former
employees of the GEAI Business. The focus of AIs business is in trucking,
rail, marine and intermodal applications. The acquisition is expected to
provide the Company with access to a broader base of customers.

Under the
terms of the Purchase Agreement, the Company paid consideration of
$15 million in cash at closing. In addition, the Company would have been
required to pay additional cash consideration of up to $2 million in or
about February 2011, contingent upon the number of new units of telematics
equipment sold or subject to a binding order to be sold by AI during the year
ending December 31, 2010. The Company originally recorded in the
preliminary purchase price allocation $1,017,000 of contingent consideration
based on the estimated number of new units of telematics equipment expected to
be sold in 2010. The contingent consideration was estimated using a probability
weighted calculation of the number of new units of telematics equipment
expected to be sold in 2010 discounted at 20.5%, which represents the Companys
weighted-average discount rate. The contingent consideration was reversed
during the second quarter of 2010 based on revised forecasts which indicated AI
would not meet the required number of new unit sales during the measurement
period for the contingent consideration.

The Company
incurred acquisition-related expenses of approximately $1,355,000, of which
$1,241,000 and $114,000 were included in selling, general and administrative
expenses in 2009 and 2010, respectively.

The
transaction was accounted for using the acquisition method of accounting and
the purchase price was assigned to the net assets acquired based on the fair
value of such assets and liabilities at the date of acquisition. The following
table summarizes the final allocation of the AI purchase price to the assets
acquired and liabilities assumed at the date of acquisition:

|                                     |  |   |            |  
|------------------------------------ |  | - | ---------- | -
|Current
 assets, excluding inventory |  | $ | 4,709,000  |  
|Inventory                            |  |   | 5,236,000  |  
|Other
 assets, net                   |  |   | 3,218,000  |  
|Current
 liabilities                 |  |   | (5,746,000 | )
|Intangibles                          |  |   | 6,365,000  |  
|Goodwill                             |  |   | 1,218,000  |  
|                                     |  |   |            |  
|                                     |  |   |            |  
|Fair value
 of assets acquired       |  | $ | 15,000,000 |  
|                                     |  |   |            |  

64

---



The goodwill
arising from the acquisition consists largely of the synergies and cost
reductions through economies of scale expected from combining the operations of
the Company and AI. The goodwill is expected to be fully deductible for tax
purposes.

The fair value
of the current assets acquired includes trade accounts receivable with a fair
value of $3,272,000. The gross amount due is $3,966,000, of which $694,000 is
expected to be uncollectible.

The results of
operations of AI have been included in the consolidated statement of operations
as of the effective date of the acquisition.

The Company
does not allocate indirect expenses, such as compensation to executives and
corporate personnel, professional fees, finance, stock based compensation
expense, and certain other operating costs, to AI. These costs are included in
the IDS operating segment. The following revenues and operating loss of AI were
included in the Companys consolidated results of operations for the year ended
December 31, 2010:

|                |  |                               |            |  
|--------------- |  | ----------------------------- | ---------- | -
|                |  | Year Ended
 December 31, 2010 |           
|                |  |                               |           
|                |  |                               |            |  
|Revenues        |  | $                             | 15,155,000 |  
|Operating
 loss |  |                               | (3,277,000 | )

The following
table represents the combined pro forma revenue and earnings for the years
ended December 31, 2008, 2009 and 2010:

|                                        |  |                                             |             |                                             |   |                                             |   |   |             |  
|--------------------------------------- |  | ------------------------------------------- | ----------- | ------------------------------------------- | - | ------------------------------------------- | - | - | ----------- | -
|                                        |  | Year EndedDecember 31,2008Pro FormaCombined |             | Year EndedDecember 31,2009Pro FormaCombined |   | Year EndedDecember 31,2010Pro FormaCombined |  
|                                        |  |                                             |             |                                             |   |                                             |  
|                                        |  | (Unaudited)                                 |             | (Unaudited)                                 |   | (Unaudited)                                 |  
|                                        |  |                                             |             |                                             |   |                                             |   |   |             |  
|Revenue                                 |  | $                                           | 49,680,000  |                                             | $ | 37,626,000                                  |   | $ | 26,103,000  |  
|Net loss                                |  |                                             | (48,841,000 | )                                           |   | (28,773,000                                 | ) |   | (12,542,000 | )
|Net loss per
 share  basic and diluted |  |                                             | (4.49       | )                                           |   | (2.62                                       | ) |   | (1.12       | )

The combined
pro forma revenue and earnings for the years ended December 31, 2008, 2009
and 2010 were prepared as if the acquisition had occurred as of January 1,
2008, 2009 and 2010, respectively. The pro forma
results do not include any anticipated cost synergies or other effects of the
planned integration of AI. Accordingly, this summary is not necessarily
indicative of what the results of operations would have been had this business
acquisition occurred during such period, nor does it purport to represent
results of operations for any future periods.

The changes in
the carrying amount of goodwill from January 1, 2009 to December 31, 2010
are as follows:

|                                 |  |     |         |    |   |           |  |   |           | 
|-------------------------------- |  | --- | ------- | -- | - | --------- |  | - | --------- | 
|                                 |  | IDS |         | AI |   | Total     | 
|                                 |  |     |         |    |   |           | 
|Balance of
 as January 1, 2009   |  | $   | 200,000 |    |   |          |  | $ | 200,000   | 
|Didbox
 acquisition              |  |     | 419,000 |    |   |           |  |   | 419,000   | 
|                                 |  |     |         |    |   |           |  |   |           | 
|Balance at
 December 31, 2009    |  |     | 619,000 |    |   |           |  |   | 619,000   | 
|Asset
 Intelligence acquisition  |  |     |        |    | $ | 1,218,000 |  |   | 1,218,000 | 
|                                 |  |     |         |    |   |           |  |   |           | 
|                                 |  |     |         |    |   |           |  |   |           | 
|Balance as
 of December 31, 2010 |  | $   | 619,000 |    | $ | 1,218,000 |  | $ | 1,837,000 | 
|                                 |  |     |         |    |   |           |  |   |           | 

65

---



Identifiable
intangible assets are comprised of the following:

|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|-------------------------- |  | --------------------- |  | ------------------- | --------- | ----------------------- | - | ----------------- | ---------- | - | --------- | --------- | 
|December 31, 2010          |  | UsefulLives(In Years) |  | GrossCarryingAmount |           | AccumulatedAmortization |   | NetCarryingAmount |           
|                           |  |                       |  |                     |           |                         |   |                   |           
|Amortized:                 |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Patents                    |  | 11                    |  | $                   | 1,489,000 |                         | $ | (135,000          | )          | $ | 1,354,000 |          
|Tradename                  |  | 5                     |  |                     | 200,000   |                         |   | (40,000           | )          |   | 160,000   |          
|Non-competition
 agreement |  | 3                     |  |                     | 234,000   |                         |   | (78,000           | )          |   | 156,000   |          
|Technology                 |  | 5                     |  |                     | 50,000    |                         |   | (12,000           | )          |   | 38,000    |          
|Workforce                  |  | 5                     |  |                     | 33,000    |                         |   | (8,000            | )          |   | 25,000    |          
|Customer
 relationships    |  | 5                     |  |                     | 4,499,000 |                         |   | (900,000          | )          |   | 3,599,000 |          
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |          
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           | 6,505,000               |   |                   | (1,173,000 | ) |           | 5,332,000 | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Unamortized:               |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Customer
 list             |  |                       |  |                     |           | 104,000                 |   |                   |           |   |           | 104,000   | 
|Trademark
 and Tradename   |  |                       |  |                     |           | 135,000                 |   |                   |           |   |           | 135,000   | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           | 239,000                 |   |                   |           |   |           | 239,000   | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Total                      |  |                       |  |                     | $         | 6,744,000               |   | $                 | (1,173,000 | ) | $         | 5,571,000 | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|December 31, 2009          |  | UsefulLives(In Years) |  | GrossCarryingAmount |           | AccumulatedAmortization |   | NetCarryingAmount |           
|                           |  |                       |  |                     |           |                         |   |                   |           
|Amortized:                 |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Technology                 |  | 5                     |  | $                   | 50,000    |                         | $ | (2,000            | )          | $ | 48,000    |          
|Workforce                  |  | 5                     |  |                     | 33,000    |                         |   | (1,000            | )          |   | 32,000    |          
|Customer
 relationships    |  | 5                     |  |                     | 56,000    |                         |   |                  |            |   | 56,000    |          
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |          
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           | 139,000                 |   |                   | (3,000     | ) |           | 136,000   | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Unamortized:               |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Customer
 list             |  |                       |  |                     |           | 104,000                 |   |                   |           |   |           | 104,000   | 
|Trademark
 and Tradename   |  |                       |  |                     |           | 135,000                 |   |                   |           |   |           | 135,000   | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           | 239,000                 |   | $                 |           |   |           | 239,000   | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 
|Total                      |  |                       |  |                     | $         | 378,000                 |   |                   | (3,000     | ) | $         | 375,000   | 
|                           |  |                       |  |                     |           |                         |   |                   |            |   |           |           | 

The Company
tests the goodwill and other intangible assets on an annual basis in the fourth
quarter or more frequently if the Company believes indicators of impairment
exist. At December 31, 2010, the Company determined that no impairment
existed to the goodwill, customer list and trademark and trade name of its
acquired intangible assets. The Company also determined that the use of
indefinite lives for the customer list and trademark and trade name remains
applicable at December 31, 2010, as the Company expects to derive future
benefits from these intangible assets.

66

---



Amortization
expense for the years ended December 31, 2008, 2009 and 2010 was $-0-, $3,000
and $1,170,000, respectively. Future amortization expense for these intangible
assets is as follows:

|                          |  |   |           | 
|------------------------- |  | - | --------- | 
|Year ending
 December 31: |  |   |           | 
|                          |  |   |           | 
|2011                      |  | $ | 1,170,000 | 
|2012                      |  |   | 1,170,000 | 
|2013                      |  |   | 1,091,000 | 
|2014                      |  |   | 1,086,000 | 
|2015                      |  |   | 135,000   | 

67

---



NOTE 10  LINE OF CREDIT

In
October 2008, the Company received an offer (the Offer) from UBS for a
put right (the ARSR) permitting the Company to sell to UBS at par value all
ARS held by the Company, all of which were purchased by the Company from UBS,
at a future date (any time during a two-year period beginning June 30,
2010). Included as part of the Offer, the Company received a commitment to
obtain a loan for 75% of the UBS-determined value of the ARS at any time until
the put option is exercised at a variable interest rate equal to the lesser of:
(i) the applicable reference rate plus a spread set forth in the
applicable credit agreement and (ii) the then-applicable weighted-average
interest or dividend rate paid to the Company by the issuer of the ARS that is
pledged to UBS as collateral. The Company accepted the Offer in
November 2008. In March 2009, the Company borrowed $12,900,000 (which
amount was equal to 75% of the UBS-determined value of the ARS) against this
credit facility. Principal payments reduced the Companys obligation to
$11,638,000 at December 31, 2009. The line of credit facility was payable on
demand. The line of credit facility was repaid in July 2010 from the
redemption of the ARS. Upon the redemption of the ARS, the line of credit
expired.

NOTE 11  NET LOSS PER SHARE

|                                                                |  |              |            |      |   |             |   |   |             |  
|--------------------------------------------------------------- |  | ------------ | ---------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                |  | December 31, |           
|                                                                |  |              |           
|Basic and diluted loss per share                                |  | 2008         |            | 2009 |   | 2010        |  
|                                                                |  |              |            |      |   |             |  
|                                                                |  |              |            |      |   |             |   |   |             |  
|Net loss                                                        |  | $            | (4,175,000 | )    | $ | (13,192,000 | ) | $ | (12,611,000 | )
|                                                                |  |              |            |      |   |             |   |   |             |  
|                                                                |  |              |            |      |   |             |   |   |             |  
|Weighted
 average common shares outstanding  basic and diluted |  |              | 10,887,000 |      |   | 10,991,000  |   |   | 11,239,000  |  
|                                                                |  |              |            |      |   |             |   |   |             |  
|                                                                |  |              |            |      |   |             |   |   |             |  
|Net loss per
 share  basic and diluted                         |  | $            | (0.38      | )    | $ | (1.20       | ) | $ | (1.12       | )
|                                                                |  |              |            |      |   |             |   |   |             |  

Basic loss per
share is calculated by dividing net loss by the weighted-average number of
common shares outstanding during the period. Diluted loss per share reflects
the potential dilution assuming common shares were issued upon the exercise of
outstanding options and the proceeds thereof were used to purchase outstanding
common shares. For the years ended December 31, 2008, 2009 and 2010, the basic
and diluted weighted-average shares outstanding are the same, since the effect
from the potential exercise of outstanding stock options of 2,601,000, 2,659,000,
and 2,666,000, respectively, would have been anti-dilutive.

NOTE 12 
STOCK-BASED COMPENSATION

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[A] | Stock options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company
 adopted the 1995 Stock Option Plan, pursuant to which the Company had the
 right to grant options to purchase up to an aggregate of 1,250,000 shares of
 common stock. The Company also adopted the 1999 Stock Option Plan, pursuant
 to which the Company had the right to grant stock awards and options to
 purchase up to 2,813,000 shares of common stock. The Company also adopted the
 1999 Director Option Plan, pursuant to which the Company had the right to
 grant options to purchase up to an aggregate of 600,000 shares of common
 stock. The 1995 Stock Option Plan expired during 2005 and the 1999 Stock
 and Director Option Plans expired during 2009 and the Company cannot issue
 additional options under these plans.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | The Company
 adopted the 2007 Equity Compensation Plan, pursuant to which the Company
 may grant options to purchase up to an aggregate of 2,000,000 shares of
 common stock. The Company also adopted the 2009 Non-Employee Director
 Equity Compensation Plan, pursuant to which the Company may grant options to
 purchase up to an aggregate of 300,000 shares of common stock. The plans are
 administered by the Compensation Committee of the Companys Board of
 Directors, which has the authority to determine, among other things, the term
 during which an option may be exercised (not more than 10 years), the
 exercise price of an option and the vesting provisions.                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | A summary of
 the status of the Companys stock option plans as of December 31, 2008, 2009
 and 2010 and changes during the years then ended, is presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

68

---



|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 
|-------------------------------- |  | ----------------- | --------- | ---------------------------------- | - | ----------------- |  | ---------------------------------- | --------- | ----------------- | - | ---------------------------------- |  |  | --------- | - | - | ----- | 
|                                 |  | 2008              |           | 2009                               |   | 2010              | 
|                                 |  |                   |           |                                    |   |                   | 
|                                 |  | Number of
 Shares |           | Weighted
 Average
 Exercise
 Price |   | Number of
 Shares |  | Weighted
 Average
 Exercise
 Price |           | Number of
 Shares |   | Weighted
 Average
 Exercise
 Price | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 
|Outstanding at beginning of year |  |                   | 2,761,000 |                                    | $ | 9.57              |  |                                    | 2,601,000 |                   | $ | 9.81                               |  |  | 2,659,000 |   | $ | 8.88  | 
|Granted                          |  |                   | 602,000   |                                    |   | 6.66              |  |                                    | 349,000   |                   |   | 3.61                               |  |  | 668,000   |   |   | 2.96  | 
|Exercised                        |  |                   | (505,000  | )                                  |   | 2.73              |  |                                    | (1,000    | )                 |   | 2.31                               |  |  | (1,000    | ) |   | 2.31  | 
|Expired                          |  |                   |          |                                    |   |                   |  |                                    | (22,000   | )                 |   | 4.13                               |  |  | (232,000  | ) |   | 7.48  | 
|Forfeited                        |  |                   | (257,000  | )                                  |   | 13.74             |  |                                    | (268,000  | )                 |   | 11.44                              |  |  | (428,000  | ) |   | 10.05 | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 
|Outstanding at end of year       |  |                   | 2,601,000 |                                    | $ | 9.81              |  |                                    | 2,659,000 |                   | $ | 8.88                               |  |  | 2,666,000 |   | $ | 7.34  | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 
|Exercisable at end of year       |  |                   | 1,485,000 |                                    | $ | 9.37              |  |                                    | 1,662,000 |                   | $ | 9.51                               |  |  | 1,522,000 |   | $ | 9.60  | 
|                                 |  |                   |           |                                    |   |                   |  |                                    |           |                   |   |                                    |  |  |           |   |   |       | 

The
following table summarizes information about stock options at December 31,
2010:

|                 |  |                     |           |                                                 |  |                                    |  |                             |       |                     |   |                                    |  |                             |           |  |   |       |  |   |        | 
|---------------- |  | ------------------- | --------- | ----------------------------------------------- |  | ---------------------------------- |  | --------------------------- | ----- | ------------------- | - | ---------------------------------- |  | --------------------------- | --------- |  | - | ----- |  | - | ------ | 
|                 |  | Options Outstanding |           | Options Exercisable                             | 
|                 |  |                     |           |                                                 | 
|Exercise
 Prices |  | Number
 Outstanding |           | Weighted
 Average
 Remaining
 Contractual
 Life |  | Weighted
 Average
 Exercise
 Price |  | Aggregate
 Intrinsic
 Value |       | Number
 Outstanding |   | Weighted
 Average
 Exercise
 Price |  | Aggregate
 Intrinsic
 Value |          
|                 |  |                     |           |                                                 |  |                                    |  |                             |       |                     |   |                                    |  |                             |          
|                 |  |                     |           |                                                 |  |                                    |  |                             |       |                     |   |                                    |  |                             |           |  |   |       |  |   |        | 
|1.97  3.81      |  |                     | 916,000   |                                                 |  | 9 years                            |  | $                           | 3.11  |                     |   |                                    |  |                             | 61,000    |  | $ | 2.87  |  |   |        | 
|3.82  7.40      |  |                     | 884,000   |                                                 |  | 4 years                            |  |                             | 5.83  |                     |   |                                    |  |                             | 725,000   |  |   | 6.03  |  |   |        | 
|7.41
  14.15    |  |                     | 630,000   |                                                 |  | 5 years                            |  |                             | 10.55 |                     |   |                                    |  |                             | 527,000   |  |   | 10.92 |  |   |        | 
|14.16 
 19.94   |  |                     | 73,000    |                                                 |  | 5 years                            |  |                             | 17.30 |                     |   |                                    |  |                             | 71,000    |  |   | 17.34 |  |   |        | 
|19.95 
 25.38   |  |                     | 163,000   |                                                 |  | 5 years                            |  |                             | 22.37 |                     |   |                                    |  |                             | 138,000   |  |   | 22.43 |  |   |        | 
|                 |  |                     |           |                                                 |  |                                    |  |                             |       |                     |   |                                    |  |                             |           |  |   |       |  |   |        | 
|                 |  |                     |           |                                                 |  |                                    |  |                             |       |                     |   |                                    |  |                             |           |  |   |       |  |   |        | 
|                 |  |                     | 2,666,000 |                                                 |  | 6 years                            |  | $                           | 7.34  |                     | $ | 262,000                            |  |                             | 1,522,000 |  | $ | 9.60  |  | $ | 32,000 | 
|                 |  |                     |           |                                                 |  |                                    |  |                             |       |                     |   |                                    |  |                             |           |  |   |       |  |   |        | 

|                                                  |  |                     |           |                                    |   |                             |  |                                                 |         |  |  |      | 
|------------------------------------------------- |  | ------------------- | --------- | ---------------------------------- | - | --------------------------- |  | ----------------------------------------------- | ------- |  |  | ---- | 
|                                                  |  | Number
 Outstanding |           | Weighted
 Average
 Exercise
 Price |   | Aggregate
 Intrinsic
 Value |  | Weighted
 Average
 Remaining
 Contractual
 Life |        
|                                                  |  |                     |           |                                    |   |                             |  |                                                 |        
|                                                  |  |                     |           |                                    |   |                             |  |                                                 |         |  |  |      | 
|Options exercisable at December 31, 2010          |  |                     | 1,522,000 |                                    | $ | 9.60                        |  | $                                               | 32,000  |  |  | 3.88 | 
|                                                  |  |                     |           |                                    |   |                             |  |                                                 |         |  |  |      | 
|Vested and expected to vest at December 31,
 2010 |  |                     | 2,666,000 |                                    | $ | 7.34                        |  | $                                               | 262,000 |  |  | 5.93 | 

69

---



The fair value
of each option grant on the date of grant is estimated using the Black-Scholes
option-pricing model reflecting the following weighted-average assumptions:

|                                                                |  |              |                 |      |   |                |   |   |                 |  
|--------------------------------------------------------------- |  | ------------ | --------------- | ---- | - | -------------- | - | - | --------------- | -
|                                                                |  | December 31, |                
|                                                                |  |              |                
|                                                                |  | 2008         |                 | 2009 |   | 2010           |  
|                                                                |  |              |                 |      |   |                |  
|                                                                |  |              |                 |      |   |                |   |   |                 |  
|Expected volatility                                             |  |              | 58.4% - 75.8    | %    |   | 54.1% - 75.6   | % |   | 52.5% - 58.9    | %
|Expected life of options                                        |  |              | 4.0  5.0 years |      |   | 3.0- 5.0 years |   |   | 3.0  5.0 years |  
|Risk free interest rate                                         |  |              | 3               | %    |   | 2              | % |   | 1.7             | %
|Dividend yield                                                  |  |              | 0               | %    |   | 0              | % |   | 0               | %
|Weighted average fair value of options
 granted during the year |  | $            | 3.87            |      | $ | 1.85           |   | $ | 1.31            |  

Expected
volatility is based on historical volatility of the Companys stock and the
expected life of options is based on historical data with respect to employee
exercise periods.

For the years
ended December 31, 2008, 2009 and 2010, the Company recorded $2,184,000,
$1,937,000 and $1,250,000, respectively, of stock-based compensation
expense in connection with the stock option grants. The total intrinsic value
of options exercised during the years ended December 31, 2008, 2009 and 2010 was
$2,476,000, $2,000 and $1,000, respectively.

The fair value
of options vested during the years ended December 31, 2008, 2009 and 2010 was
$2,209,000, $2,178,000 and $1,677,000, respectively. As of December 31, 2010,
there was $1,817,000 of total unrecognized compensation costs related to
non-vested options granted under the Companys stock option plans. That cost is
expected to be recognized over a weighted-average period of 1.76 years.

70

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[B] | Restricted Stock Awards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | In 2006,
 Company began granting restricted stock to employees, whereby the employees
 are contractually restricted from transferring the shares until they are
 vested. The stock is unvested at the time of grant and, upon vesting, there
 are no legal restrictions on the stock. The fair value of each share is based
 on the Companys closing stock price on the date of the grant. A summary of
 the non-vested shares for the years ended December 31, 2008, 2009 and 2010 is
 as follows:

|                                 |  |                               |         |                                            |   |       | 
|-------------------------------- |  | ----------------------------- | ------- | ------------------------------------------ | - | ----- | 
|                                 |  | Number of
 Non-vested
 Shares |         | Weighted
 Average
 Grant
 Date
 Fair Value |  
|                                 |  |                               |         |                                            |  
|                                 |  |                               |         |                                            |   |       | 
|Non-vested
 at January 1, 2008   |  |                               | 65,000  |                                            | $ | 17.40 | 
|Granted                          |  |                               | 21,000  |                                            |   | 7.41  | 
|Vested                           |  |                               | (50,000 | )                                          |   | 17.96 | 
|Forfeited                        |  |                               | (5,000  | )                                          |   | 18.89 | 
|                                 |  |                               |         |                                            |   |       | 
|                                 |  |                               |         |                                            |   |       | 
|Non-vested
 at December 31, 2008 |  |                               | 31,000  |                                            | $ | 9.49  | 
|Granted                          |  |                               | 162,000 |                                            |   | 3.54  | 
|Vested                           |  |                               | (21,000 | )                                          |   | 10.55 | 
|Forfeited                        |  |                               |        |                                            |   |       | 
|                                 |  |                               |         |                                            |   |       | 
|                                 |  |                               |         |                                            |   |       | 
|Non-vested
 at December 31, 2009 |  |                               | 172,000 |                                            | $ | 3.78  | 
|Granted                          |  |                               | 206,000 |                                            |   | 2.73  | 
|Vested                           |  |                               | (20,000 | )                                          |   | 5.62  | 
|Forfeited                        |  |                               | (39,000 | )                                          |   | 3.15  | 
|                                 |  |                               |         |                                            |   |       | 
|                                 |  |                               |         |                                            |   |       | 
|Non-vested
 at December 31, 2010 |  |                               | 319,000 |                                            | $ | 3.07  | 
|                                 |  |                               |         |                                            |   |       | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | For the
 years ended December 31, 2008, 2009 and 2010, the Company recorded $513,000,
 $205,000 and $273,000, respectively, of stock-based compensation expense in
 connection with the restricted stock grants. As of December 31, 2010, there
 was $645,000 of total unrecognized compensation cost related to non-vested
 shares. That cost is expected to be recognized over a weighted-average period
 of 1.90 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|[C] | Performance Shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | In January
 2007, the Compensation Committee granted 62,500 performance shares to key
 employees pursuant to the 1999 Stock Option Plan. The issuance of the shares
 of the Companys common stock underlying the performance shares is subject to
 the achievement of revenue and gross margin levels during a two-year
 performance period. If the performance criteria are not met during
 that two-year period, then the performance shares will not vest and will
 automatically be returned to the plan. If the performance triggers are met,
 then the shares will be issued to the employees. For the years ended December
 31, 2007 and 2008, the performance criteria were not met, and 62,500 shares
 were returned to the plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | In January
 2008, the Compensation Committee granted 52,500 performance shares to key
 employees pursuant to the 1999 Stock Option Plan. The issuance of the shares
 of the Companys common stock underlying the performance shares is subject to
 the achievement of revenue levels during a one-year performance period. If
 the performance criteria are not met during that one-year period, then the
 performance shares will not vest and will automatically be returned to the
 plan. If the performance triggers are met, then the shares will be issued to
 the employees. For the year ended December 31, 2008, the performance criteria
 were met for 39,375 shares, which were issued in 2009, and 13,125 shares were
 returned to the plan. For the year ended December 31, 2008, the Company
 recorded $292,000 of stock-based compensation expense in connection with the
 performance shares.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | In June
 2009, the Compensation Committee granted 233,000 performance shares to key
 employees pursuant to the 2007 Equity Compensation Plan. The issuance of the
 shares of the Companys common stock underlying the performance shares is
 subject to the achievement of stock price targets of the Companys common
 stock at the end of a three-year measurement period ending in January 2012,
 with the ability to achieve prorated performance shares during interim annual
 measurement periods from January 31, 2009 to January 31, 2012. January of
 each year from 2009 to 2012 is used as the interim measurement date, since it
 is assumed that earnings announcements will take place in January with
 respect to the preceding year end. If the performance triggers are not met,
 the performance shares will not vest and will automatically be returned to
 the plan. If the performance triggers are met, then the shares will be
 issued to the employees. For the years ended December 31, 2009 and 2010, the
 Company recorded $15,000 and $30,000, respectively, of stock-based
 compensation expense in connection with the performance shares. As of
 December 31, 2010, there was $44,000 of total unrecognized compensation
 expense. That cost is expected to be recognized over a weighted-average period
 of 1.2 years.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | In February
 2010 and October 2010, the Compensation Committee granted 44,000 and 50,000
 performance shares to key employees pursuant to the 2007 Equity Compensation
 Plan. The issuance of the shares of the Companys common stock underlying the
 performance shares is subject to the achievement of stock price targets of
 the Companys common stock at the end of a three-year measurement period
 ending in October 2013, with the ability to achieve prorated performance
 shares during interim annual measurement periods from January 31, 2010 to
 January 31, 2013. January of each year from 2010 to 2013 is used as the
 interim measurement date, since it is assumed that earnings announcements
 will take place in January with respect to the preceding year end. If the
 performance triggers are not met, the performance shares will not vest and
 will automatically be returned to the plan. If the performance
 triggers are met, then the shares will be issued to the employees. For
 the year ended December 31, 2010, the Company recorded $5,000 of stock-based
 compensation expense in connection with the performance shares. As of
 December 31, 2010, there was $20,000 of total unrecognized compensation
 expense. That cost is expected to be recognized over a weighted-average period
 of 2.4 years.       

71

---



NOTE 13 
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts
payable and accrued expenses consists of the following:

|                                  |  |                    |           |                    |   |           | 
|--------------------------------- |  | ------------------ | --------- | ------------------ | - | --------- | 
|                                  |  | December 31,
 2009 |           | December 31,
 2010 |  
|                                  |  |                    |           |                    |  
|Accounts
 payable                 |  | $                  | 1,824,000 |                    | $ | 6,816,000 | 
|Accrued
 warranty                 |  |                    |          |                    |   | 2,069,000 | 
|Accrued
 contingent consideration |  |                    | 110,000   |                    |   |          | 
|Other
 current liabilities        |  |                    | 160,000   |                    |   | 256,000   | 
|                                  |  |                    |           |                    |   |           | 
|                                  |  |                    |           |                    |   |           | 
|                                  |  | $                  | 2,094,000 |                    | $ | 9,141,000 | 
|                                  |  |                    |           |                    |   |           | 

The accrued
contingent consideration that was recorded in 2009 in connection with the
Didbox acquisition was reversed during the third quarter of 2010, as the
Company does not expect Didbox to meet the revenue and operating profit targets
required to be met in order for the contingent consideration to be payable.

The Companys
AI segment warrants its products against defects in materials and workmanship
for a period of 12 months from the date of acceptance of the product by
the customer. The customers may purchase an extended warranty providing
coverage up to a maximum of 60 months. A provision for estimated future
warranty costs is recorded for expected or historical warranty matters related
to equipment shipped.

The following
table summarizes warranty activity during the year ended December 31,
2010:

|                                                                 |  |                    |           |  
|---------------------------------------------------------------- |  | ------------------ | --------- | -
|                                                                 |  | December 31,
 2010 |          
|                                                                 |  |                    |          
|                                                                 |  |                    |           |  
|Accrued
 warranty reserve, January 7, 2010 (date of acquisition) |  | $                  | 2,657,000 |  
|Accrual for
 product warranties issued                           |  |                    | 294,000   |  
|Product
 replacements and other warranty expenditures            |  |                    | (736,000  | )
|Expiration
 of warranties                                        |  |                    | (146,000  | )
|                                                                 |  |                    |           |  
|                                                                 |  |                    |           |  
|Accrued
 warranty reserve, end of period                         |  | $                  | 2,069,000 |  
|                                                                 |  |                    |           |  

NOTE 14 
CONCENTRATION OF CUSTOMERS

One customer
accounted for 26% of the Companys revenue and 13% of the Companys accounts
receivable during the year ended and as of December 31, 2010.

Four customers
accounted for 20%, 15%, 15% and 14%, respectively, of the Companys revenue
during the year ended December 31, 2009. Two of these customers accounted for
40% and 13% of the Companys accounts receivable and unbilled receivables at
December 31, 2009.

Two customers
accounted for 42% and 41%, respectively, of the Companys revenue during the
year ended December 31, 2008. These two customers accounted for 28% and 48%,
respectively, of the Companys accounts receivable and unbilled receivables at December
31, 2008.

72

---



NOTE 15 - STOCKHOLDERS EQUITY

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[A] | Preferred stock:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Company
 is authorized to issue 5,000,000 shares of preferred stock, par value $0.01
 per share. The Companys Board of Directors has the authority to issue shares
 of preferred stock and to determine the price and terms of those shares. No
 shares of preferred stock are issued and outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|[B] | Stock repurchase program:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | On November 3, 2010, the Companys
         Board of Directors authorized the repurchase of issued and outstanding
         shares of the Companys common stock having an aggregate value
         of up to $3,000,000 pursuant to a share repurchase program. The repurchases
         under the share repurchase program will be made from time to time in
         the open market or in privately negotiated transactions and will be
         funded from the Companys working capital. The amount and timing
         of such repurchases will be dependent upon the price and availability
         of shares, general market conditions and the availability of cash, as
         determined at the discretion of the Companys management. All shares
         of common stock repurchased under the Companys share repurchase
         program are held as treasury stock. As of December 31, 2010, the Company
         has purchased approximately 36,000 shares of its common stock in open
         market transactions under the stock repurchase program for an aggregate
         purchase price of approximately $99,000, or an average cost of $2.71
         per share.                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | In addition, on May 3, 2007, the Company previously had announced that its
Board of Directors had authorized the repurchase of issued and outstanding shares of our
common stock having an aggregate value of up to $10,000,000 pursuant to a share repurchase
program (the 2007 Repurchase Program). The Company did not purchase any shares
of its common stock under the 2007 Repurchase Program during the years ended December 31, 2009
or 2010. As of December 31, 2010, the Company had purchased approximately 1,075,000 shares
of its common stock in open market transactions under the 2007 Repurchase Program for
an aggregate purchase price of approximately $9,970,000, or an average cost of $9.27 per share.
The repurchases were funded from the Companys working capital, and the amount and timing of
such repurchases depended upon the price and availability of shares, general market conditions
and the availability of cash, as determined at the discretion of our management. The 2007
Repurchase Program does not have an expiration date, and the Company may discontinue or suspend
the 2007 Repurchase Program at any time.  All shares of common stock repurchased under the 2007
Repurchase Program are held as treasury stock.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

73

---



|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[C]                    | Rights plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | In July
 2009, the Company amended its Amended and Restated Certificate of Incorporation
 in order to create a new series of preferred stock, to be designated the
 Series A Junior Participating Preferred Stock (hereafter referred to as
 Preferred Stock). Shareholders of the Preferred Stock will be entitled
 to certain minimum quarterly dividend rights, voting rights, and liquidation
 preferences. Because of the nature of the Series A Preferred Stocks
 dividend, liquidation and voting rights, the value of a share of Preferred
 Stock is expected to approximate the value of one share of the Companys
 common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | In July
 2009, the Company also adopted a shareholder rights plan (the Rights Plan),
 which entitles the holders of the rights to purchase from the Company 1/1,000th (subject to prospective
 anti-dilution adjustments) of a share of Preferred Stock of the Company at a
 purchase price of $19.47 (a Right). The Rights Plan has a three-year term
 with the possibility of two separate three-year renewals. Until a Right is
 exercised or exchanged in accordance with the provisions of
 the rights agreement governing the Rights Plan, the holder thereof,
 as such, will have no rights as a stockholder of the Company, including,
 without limitation, the right to vote for the election of directors or upon
 any matter submitted to stockholders of the Company or to receive dividends
 or subscription rights. The Rights were registered with the
 Securities and Exchange Commission in July 2009.                                                                                                                                                                                                                                                                                                                      
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | On June 29,
 2009, the Board of Directors of the Company declared a dividend of one Right
 for each outstanding share of common stock. The dividend was paid on July 13,
 2009 to the stockholders of record on that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|[D]                    | Shares
withheld:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | During the
 year ended December 31, 2008, 51,000 shares of the Companys common stock
 were withheld to satisfy tax withholding obligations and to pay the exercise
 price of such awards in the aggregate amount of $424,000 in connection with
 the vesting of restricted shares and the exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | During the
 year ended December 31, 2009, 20,000 shares of the Companys common stock
 were withheld to satisfy tax withholding obligations and to pay the exercise
 price of such awards in the aggregate amount of $65,000 in connection with
 the vesting of restricted shares and the exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | During the
 year ended December 31, 2010, 4,000 shares of the Companys common stock were
 withheld to satisfy tax withholding obligations and to pay the exercise price
 of such awards in the aggregate amount of $10,000 in connection with the
 vesting of restricted shares and the exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                      
|NOTE 16 - INCOME TAXES
|                      
|                       | At December
 31, 2010, the Company had an aggregate net operating loss carryforward of
 approximately $44,170,000 for U.S. federal income tax purposes, of which
 $7,509,000 relates to stock options for which there were no compensation
 charges for financial reporting. Accordingly, any future tax benefit upon
 utilization of that net operating loss would be credited to additional
 paid-in capital. The Company has not included this amount in deferred tax
 assets. At December 31, 2010, the Company had an aggregate net operating loss
 carryforward of approximately $33,726,000 for state income tax purposes and a
 foreign net operating loss carryforward of approximately $437,000.
 Substantially all of the net operating loss carryforwards expire from 2021
 through 2030 for federal purposes and from 2011 through 2017 for state
 purposes. The net operating loss carryforwards may be limited to use in any
 particular year based on Internal Revenue Code sections related to change of
 ownership restrictions. In addition, future stock issuances may subject the
 Company to annual limitations on the utilization of its net operating loss
 carryforwards under the same Internal Revenue Code provision.
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | The Company
 has net deferred tax assets of approximately $13,459,000 and $17,782,000 at
 December 31, 2009 and 2010, respectively. The increase in the deferred tax
 asset is primarily attributable to net operating losses. The Company had
 other temporary differences between financial and tax reporting for
 stock-based compensation, fixed asset depreciation expense, deferred revenue,
 deferred expenses and acquisition-related expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       | The Company
 has elected to use the incremental approach for financial statement purposes.
 Under this approach, the Company will utilize net operating loss
 carryforwards before utilizing excess benefit from exercise of options during
 the current year. The Company has provided a valuation allowance against the
 full amount of its deferred tax asset, since the likelihood of realization
 cannot be determined. The valuation allowance increased in 2008, 2009 and
 2010 by $535,000, $4,592,000 and $4,323,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

74

---



Loss before
income taxes consists of the following:

|                    |  |                         |            |      |   |             |   |   |             |  
|------------------- |  | ----------------------- | ---------- | ---- | - | ----------- | - | - | ----------- | -
|                    |  | Year Ended December 31, |           
|                    |  |                         |           
|                    |  | 2008                    |            | 2009 |   | 2010        |  
|                    |  |                         |            |      |   |             |  
|                    |  |                         |            |      |   |             |   |   |             |  
|U.S.
 operations    |  | $                       | (4,175,000 | )    | $ | (13,120,000 | ) | $ | (12,310,000 | )
|Foreign
 operations |  |                         |           |      |   | (72,000     | ) |   | (301,000    | )
|                    |  |                         |            |      |   |             |   |   |             |  
|                    |  |                         |            |      |   |             |   |   |             |  
|                    |  | $                       | (4,175,000 | )    | $ | (13,192,000 | ) | $ | (12,611,000 | )
|                    |  |                         |            |      |   |             |   |   |             |  

The difference
between income taxes at the statutory federal income tax rate and income taxes
reported in the statements of operations is attributable to the following:

|                                                              |  |                         |            |      |   |            |   |   |            |  
|------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ---------- | - | - | ---------- | -
|                                                              |  | Year Ended December 31, |           
|                                                              |  |                         |           
|                                                              |  | 2008                    |            | 2009 |   | 2010       |  
|                                                              |  |                         |            |      |   |            |  
|                                                              |  |                         |            |      |   |            |   |   |            |  
|Income tax benefit at the federal statutory
 rate             |  | $                       | (1,419,000 | )    | $ | (4,485,000 | ) | $ | (4,283,000 | )
|State and local income taxes, net of effect
 on federal taxes |  |                         | (248,000   | )    |   | (792,000   | ) |   | (824,000   | )
|Increase (decrease) in valuation allowance                    |  |                         | 535,000    |      |   | 4,592,000  |   |   | 4,323,000  |  
|Fixed assets accumulated book/tax
 difference - prior year    |  |                         | (196,000   | )    |   |           |   |   |            |  
|ISO grants and restricted shares                              |  |                         | 990,000    |      |   | 655,000    |   |   | 484,000    |  
|Expiration of state net operating loss                        |  |                         | 254,000    |      |   | 129,000    |   |   | 141,000    |  
|Other                                                         |  |                         | 84,000     |      |   | (99,000    | ) |   | 159,000    |  
|                                                              |  |                         |            |      |   |            |   |   |            |  
|                                                              |  |                         |            |      |   |            |   |   |            |  
|                                                              |  | $                       |           |      | $ |           |   | $ |           |  
|                                                              |  |                         |            |      |   |            |   |   |            |  

The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2010
are presented below:

|                                       |  |              |             |      |   |             |  
|-------------------------------------- |  | ------------ | ----------- | ---- | - | ----------- | -
|                                       |  | December 31, |            
|                                       |  |              |            
|                                       |  | 2009         |             | 2010 |  
|                                       |  |              |             |      |  
|                                       |  |              |             |      |   |            
|Deferred tax assets:                   |  |              |             |      |   |             |  
|Net operating loss carryforwards       |  | $            | 11,745,000  |      | $ | 14,122,000  |  
|Fixed assets, depreciation             |  |              | 207,000     |      |   | 70,000      |  
|Stock-based compensation               |  |              | 994,000     |      |   | 1,120,000   |  
|Acquisition related expenses           |  |              | 513,000     |      |   | 513,000     |  
|Deferred revenue                       |  |              |            |      |   | 2,035,000   |  
|Intangibles, amortization              |  |              |            |      |   | 240,000     |  
|Inventories                            |  |              |            |      |   | 728,000     |  
|Other deductible temporary differences |  |              |            |      |   | 143,000     |  
|                                       |  |              |             |      |   |             |  
|                                       |  |              |             |      |   |             |  
|Total gross deferred tax assets        |  |              | 13,459,000  |      |   | 18,971,000  |  
|Less: Valuation allowance              |  |              | (13,459,000 | )    |   | (17,782,000 | )
|                                       |  |              |             |      |   |             |  
|                                       |  |              |             |      |   | 1,189,000   |  
|Deferred tax liabilities               |  |              |             |      |   |             |  
|Deferred expenses                      |  |              |            |      |   | (1,189,000  | )
|                                       |  |              |             |      |   |             |  
|Net deferred tax assets                |  | $            |            |      | $ |            |  
|                                       |  |              |             |      |   |             |  

75

---



NOTE 17  WHOLLY OWNED FOREIGN SUBSIDIARIES

In May 2009,
the Company formed an entity in Germany called I.D. Systems, GmbH (the GmbH).
This foreign entity is wholly owned by I.D. Systems, Inc. The GmbH financial
statements are consolidated with the financial statements of I.D. Systems, Inc.

The net
revenue and net loss for the GmbH included in the consolidated statement of
operations are as follows:

|            |  |                         |   |      |   |          |   |   |           |  
|----------- |  | ----------------------- | - | ---- | - | -------- | - | - | --------- | -
|            |  | Year Ended December 31, |  
|            |  |                         |  
|            |  | 2008                    |   | 2009 |   | 2010     |  
|            |  |                         |   |      |   |          |  
|            |  |                         |   |      |   |          |   |   |           |  
|Net revenue |  | $                       |  |      | $ | 363,000  |   | $ | 1,111,000 |  
|            |  |                         |   |      |   |          |   |   |           |  
|Net loss    |  |                         |  |      |   | (103,000 | ) |   | (185,000  | )

Total assets
of the GmbH were $555,000 and $1,051,000 as of December 31, 2009 and 2010,
respectively. The GmbH operates in a local currency environment using the Euro
as its functional currency.

Existing
European sales orders/contracts prior to the formation of the GmbH and related
accounting activity will remain in I.D. Systems, Inc. until settled or
completed. Existing European employees and contractors and their related
agreements were transferred to the GmbH in August 2009.

In October
2009, the Company acquired Didbox Ltd. (Didbox). This foreign entity is
wholly owned by I.D. Systems, Inc. and is headquartered in the United Kingdom.
The Didbox financial statements are consolidated with the financial statements
of I.D. Systems, Inc. as of the effective date of acquisition.

The net
revenue and net loss for Didbox included in the consolidated statement of
operations are as follows:

|            |  |                         |   |      |   |         |  |   |          |  
|----------- |  | ----------------------- | - | ---- | - | ------- |  | - | -------- | -
|            |  | Year Ended December 31, |  
|            |  |                         |  
|            |  | 2008                    |   | 2009 |   | 2010    | 
|            |  |                         |   |      |   |         | 
|            |  |                         |   |      |   |         |  |   |          |  
|Net revenue |  | $                       |  |      | $ | 142,000 |  | $ | 395,000  |  
|            |  |                         |   |      |   |         |  |   |          |  
|Net loss    |  |                         |  |      |   | 31,000  |  |   | (116,000 | )

Didboxs total
assets were $782,000 and $719,000 as of December 31, 2009 and 2010,
respectively. Didbox operates in a local currency environment using the British
Pound as its functional currency.

Income and
expense accounts of foreign operations are translated at actual or
weighted-average exchange rates during the period. Assets and liabilities of
foreign operations that operate in a local currency environment are translated
to U.S. dollars at the exchange rates in effect at the balance sheet date, with
the related translation gains or losses reported as components of accumulated
other comprehensive income/loss in consolidated stockholders equity. Net
exchange gains or losses resulting from the translation of foreign financial
statements and the effect of exchange rate changes on intercompany transactions
of a long-term investment nature with GmbH resulted in a translation gain (loss)
of $1,000 and $(23,000) at December 31, 2009 and 2010, respectively, which is
included in comprehensive loss in the consolidated statement of changes in
stockholders equity.

Gains and
losses resulting from foreign currency transactions are included in determining
net income or loss. Foreign currency transaction gains (losses) for the years
ended December 31, 2009 and 2010 of $9,000 and ($20,000) are included in  selling,
general and administrative expenses in the consolidated statement of operations.

76

---



NOTE 18 - COMPREHENSIVE LOSS

Comprehensive
loss includes net loss and unrealized gains or losses on available-for-sale
investments and foreign currency translation gains and losses. Cumulative
unrealized gains and losses on available-for-sale investments are reflected as
accumulated other comprehensive loss in stockholders equity on the Companys
consolidated balance sheet. The components of our comprehensive income are as
follows:

|                                                                    |  |                         |            |      |   |             |   |   |             |  
|------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                    |  | Year Ended December 31, |           
|                                                                    |  |                         |           
|                                                                    |  | 2008                    |            | 2009 |   | 2010        |  
|                                                                    |  |                         |            |      |   |             |  
|Net loss                                                            |  | $                       | (4,175,000 | )    | $ | (13,192,000 | ) | $ | (12,611,000 | )
|Unrealized
 gain (loss) on available-for-sale marketable securities |  |                         | 35,000     |      |   | (107,000    | ) |   | 46,000      |  
|Foreign
 currency translation                                       |  |                         |           |      |   | 1,000       |   |   | (23,000     | )
|                                                                    |  |                         |            |      |   |             |   |   |             |  
|                                                                    |  |                         |            |      |   |             |   |   |             |  
|Total other
 comprehensive loss                                     |  | $                       | (4,140,000 | )    | $ | (13,298,000 | ) |   | (12,588,000 | )
|                                                                    |  |                         |            |      |   |             |   |   |             |  

The accumulated balances for
each classification of other comprehensive loss are as follows:

|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|------------------------------------------------------------------------- |  | ------------------------ | ------- | ------------------------------------------ | - | ----------------------------------------- | - | - | -------- | -
|                                                                          |  | Foreign
 currency
 items |         | Unrealized
 gain (losses)
 on
 investments |   | Accumulated
 other
 comprehensive
 income |  
|                                                                          |  |                          |         |                                            |   |                                           |  
|Balance at January 1, 2008                                                |  | $                        |        |                                            | $ | 11,000                                    |   | $ | 11,000   |  
|Net current
 period change                                                |  |                          |         |                                            |   | 35,000                                    |   |   | 35,000   |  
|Reclassification
 adjustments for gains (losses) reclassified into income |  |                          |        |                                            |   |                                          |   |   |         |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|Balance at December 31, 2008                                              |  | $                        |        |                                            | $ | 46,000                                    |   | $ | 46,000   |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|Net current
 period change                                                |  |                          | 1,000   |                                            |   | (107,000                                  | ) |   | (106,000 | )
|Reclassification
 adjustments for gains (losses) reclassified into income |  |                          |        |                                            |   |                                          |   |   |         |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|Balance at December 31, 2009                                              |  | $                        | 1,000   |                                            | $ | (61,000                                   | ) | $ | (60,000  | )
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|Net current
 period change                                                |  |                          | (23,000 | )                                          |   | 46,000                                    |   |   | 23,000   |  
|Reclassification
 adjustments for gains (losses) reclassified into income |  |                          |        |                                            |   |                                          |   |   |         |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  
|Balance at December 31, 2010                                              |  | $                        | (22,000 | )                                          | $ | (15,000                                   | ) | $ | (37,000  | )
|                                                                          |  |                          |         |                                            |   |                                           |   |   |          |  

NOTE 19 -
OPERATING SEGMENTS

Prior to the
Asset Intelligence (AI) acquisition in January 2010, the Company operated in
a single reportable segment, consisting of the historical operations of I.D.
Systems, Inc. (IDS). Subsequent thereto, the Company has determined that it
has two reportable segments organized by product line: IDS and AI. The IDS
operating segment includes the Companys core wireless asset management systems
operations: I.D. Systems, Inc., I.D. Systems, GmbH, and Didbox Ltd. This core
business develops, markets and sells wireless solutions for managing and
securing high-value enterprise assets such as industrial trucks. The AI
operating segment, which consists of Asset Intelligence, LLC, provides
data-driven telematics solutions for tracking and managing supply chain assets
such as trailers and containers.

The Company
does not allocate indirect expenses, such as compensation to executives and
corporate personnel, professional fees, finance, stock-based compensation
expense, and certain other operating costs, to the individual segments. These
costs are included in the IDS operating segment. The total assets of each segment
are comprised of the assets of the subsidiaries operating in that segment.

A summary of
segment information as of and for the years ended December 31, 2008, 2009 and
2010 is presented below:

|                              |  |                   |            |                   |   |                   |  |     |            |    |   |             |   |     |   |    |   |             |   |   |             |   |   |            |   |   |             |  
|----------------------------- |  | ----------------- | ---------- | ----------------- | - | ----------------- |  | --- | ---------- | -- | - | ----------- | - | --- | - | -- | - | ----------- | - | - | ----------- | - | - | ---------- | - | - | ----------- | -
|                              |  | December 31, 2008 |            | December 31, 2009 |   | December 31, 2010 | 
|                              |  | IDS               |            | AI                |   | Total             |  | IDS |            | AI |   | Total       |   | IDS |   | AI |   | Total       |  
|                              |  |                   |            |                   |   |                   |  |     |            |    |   |             |   |     |   |    |   |             |  
|Revenues                      |  | $                 | 27,046,000 |                   | $ |                  |  | $   | 27,046,000 |    | $ | 10,316,000  |   | $   |  |    | $ | 10,316,000  |   | $ | 10,706,000  |   | $ | 15,155,000 |   | $ | 25,861,000  |  
|Depreciation and amortization |  |                   | 540,000    |                   |   |                  |  |     | 540,000    |    |   | 533,000     |   |     |  |    |   | 533,000     |   |   | 494,000     |   |   | 1,941,000  |   |   | 2,435,000   |  
|Operating loss                |  |                   | (6,063,000 | )                 |   |                  |  |     | (6,063,000 | )  |   | (14,385,000 | ) |     |  |    |   | (14,385,000 | ) |   | (10,057,000 | ) |   | (3,277,000 | ) |   | (13,334,000 | )
|Capital expenditures          |  |                   | 188,000    |                   |   |                  |  |     | 188,000    |    |   | 518,000     |   |     |  |    |   | 518,000     |   |   | 447,000     |   |   | 1,012,000  |   |   | 1,459,000   |  
|Total assets                  |  | $                 | 69,948,000 |                   | $ |                  |  | $   | 69,948,000 |    | $ | 70,575,000  |   | $   |  |    | $ | 70,575,000  |   | $ | 35,735,000  |   | $ | 25,150,000 |   | $ | 60,885,000  |  
|                              |  |                   |            |                   |   |                   |  |     |            |    |   |             |   |     |   |    |   |             |   |   |             |   |   |            |   |   |             |  

NOTE 20  REDUCTION IN WORK FORCE

As a result of
the integration of AI, the Company eliminated 39 positions during 2010,
representing approximately 32% of our total personnel. In order to earn a
severance payment, affected employees were required to complete their
transition duties and execute a general release agreement. Total severance
costs incurred during the year ended December 31, 2010 were $487,000, of which
$100,000 is included in research and development expenses and $387,000 is
included in selling, general and administrative expenses in the consolidated
statement of operations. As of December 31, 2010, these costs have been paid.

77

---



NOTE 21  COMMITMENTS AND CONTINGENCIES

Except for
normal operating leases, the Company is not currently subject to any material
commitments.

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[A] | Contingencies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company is not currently subject to any material commitments and legal proceedings, nor, to managements knowledge, is any material legal proceeding threatened against the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[B] | Severance agreements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company
 entered into severance agreements with five of its executive officers. The
 severance agreements, each of which is substantially identical in form,
 provide each executive with certain severance and change in control benefits
 upon the occurrence of a Trigger Event, as defined in the severance
 agreements. As a condition to the Companys obligations under the severance
 agreements, each executive has executed and delivered to the Company a
 restrictive covenants agreement.                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Under the
 terms of the severance agreements, each executive is entitled to the
 following: (i) a cash payment at the rate of the executives annual base
 salary as in effect immediately prior to the Trigger Event for a period of 12
 or 18 months, depending on the executive, (ii) continued healthcare coverage
 during the severance period, (iii) partial accelerated vesting of the
 executives previously granted stock options and restricted stock awards, and
 (iv) an award of Performance Shares under the Restricted Stock Unit Award
 Agreement previously entered into between the Company and the executive.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[C] | Operating leases:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company
 is obligated under operating leases for its facilities and offices. The
 Companys operating leases provide for minimum annual rental payments as
 follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                          |  |   |          
|------------------------- |  | - | ---------
|Year Ending
 December 31, |  |   |          
|                          |  |   |          
|                          |  |   |          
|2011                      |  | $ | 634,000  
|2012                      |  |   | 429,000  
|2013                      |  |   | 439,000  
|2014                      |  |   | 447,000  
|2015                      |  |   | 466,000  
|Thereafter                |  |   | 2,531,000
|                          |  |   |          
|                          |  |   |          
|                          |  | $ | 4,946,000
|                          |  |   |          

The office
lease for the Companys executive offices in Woodcliff Lake, New Jersey, which
expires in February 2021, also provides for escalations relating to increases
in real estate taxes and certain operating expenses. In addition, the Company
leases sales and administrative offices in Plano, Texas, Basingstoke, United
Kingdom and Dusseldorf, Germany.

Minimum rent
payments under operating leases are recognized on a straight-line basis over
the term of the lease including any periods of free rent. Rental expense for
operating leases was approximately $568,000, $596,000 and $596,000 for the
years ended December 31, 2008, 2009 and 2010, respectively.

78

---



NOTE 22 - QUARTERLY SELECTED FINANCIAL DATA
(UNAUDITED)

The following
tables contain selected quarterly financial data for each quarter for the years
ended December 31, 2009 and 2010. We believe the following information reflects
all normal recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any period are
not necessarily indicative of results for any future periods.

|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|--------------------------------------------- |  | ---------------------------- | ---------- | ----------- | - | ----------- | - | ----------- | ---------- | - | - | ---------- | ---
|                                              |  | Year Ended December 31, 2010 |           
|                                              |  |                              |           
|                                              |  | 1st Quarter                  |            | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter |           
|                                              |  |                              |            |             |   |             |   |             |           
|Revenue:                                      |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Products                                      |  | $                            | 2,023,000  |             | $ | 1,829,000   |   | $           | 2,542,000  |   | $ | 3,089,000  |    
|Services                                      |  |                              | 4,101,000  |             |   | 4,184,000   |   |             | 3,948,000  |   |   | 4,145,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              | 6,124,000  |             |   | 6,013,000   |   |             | 6,490,000  |   |   | 7,234,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Cost of
 revenue:                             |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Cost of
 products                             |  |                              | 975,000    |             |   | 865,000     |   |             | 1,507,000  |   |   | 1,730,000  |    
|Cost of services                              |  |                              | 1,764,000  |             |   | 1,532,000   |   |             | 1,595,000  |   |   | 1,472,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              | 2,739,000  |             |   | 2,397,000   |   |             | 3,102,000  |   |   | 3,202,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Gross Profit                                  |  |                              | 3,385,000  |             |   | 3,616,000   |   |             | 3,388,000  |   |   | 4,032,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Selling,
 general and administrative expenses |  |                              | 6,474,000  |             |   | 6,689,000   |   |             | 4,424,000  |   |   | 5,739,000  | (a)
|Research and
 development expenses            |  |                              | 1,154,000  |             |   | 1,119,000   |   |             | 1,089,000  |   |   | 1,067,000  |    
|Other
 income, net                            |  |                              | 180,000    |             |   | 166,000     |   |             | 267,000    |   |   | 110,000    |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Net loss                                      |  | $                            | (4,063,000 | )           | $ | (4,026,000  | ) | $           | (1,858,000 | ) | $ | (2,664,000 | )  
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Net loss per
 share  basic and diluted       |  | $                            | (0.36      | )           | $ | (0.36       | ) | $           | (0.17      | ) | $ | (0.24      | )  
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  | Year Ended December 31, 2009 |           
|                                              |  |                              |           
|                                              |  | 1st Quarter                  |            | 2nd Quarter |   | 3rd Quarter |   | 4th Quarter |           
|                                              |  |                              |            |             |   |             |   |             |           
|Revenue:                                      |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Products                                      |  | $                            | 1,378,000  |             | $ | 1,771,000   |   | $           | 1,218,000  |   | $ | 2,103,000  |    
|Services                                      |  |                              | 1,556,000  |             |   | 913,000     |   |             | 623,000    |   |   | 754,000    |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              | 2,934,000  |             |   | 2,684,000   |   |             | 1,841,000  |   |   | 2,857,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Cost of
 revenue:                             |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Cost of
 products                             |  |                              | 798,000    |             |   | 890,000     |   |             | 603,000    |   |   | 1,591,000  |    
|Cost of
 services                             |  |                              | 547,000    |             |   | 323,000     |   |             | 339,000    |   |   | 463,000    |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              | 1,345,000  |             |   | 1,213,000   |   |             | 942,000    |   |   | 2,054,000  |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Gross profit                                  |  |                              | 1,589,000  |             |   | 1,471,000   |   |             | 899,000    |   |   | 803,000    |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Selling,
 general and administrative expenses |  |                              | 4,211,000  |             |   | 3,764,000   |   |             | 3,644,000  |   |   | 4,924,000  |    
|Research and
 development expenses            |  |                              | 689,000    |             |   | 691,000     |   |             | 642,000    |   |   | 582,000    |    
|Other
 income, net                            |  |                              | 239,000    |             |   | 660,000     |   |             | 350,000    |   |   | (56,000    | )  
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Net loss                                      |  | $                            | (3,072,000 | )           | $ | (2,324,000  | ) | $           | (3,037,000 | ) | $ | (4,759,000 | )  
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    
|Net loss per
 share  basic and diluted       |  | $                            | (0.28      | )           | $ | (0.21       | ) | $           | (0.27      | ) | $ | (0.43      | )  
|                                              |  |                              |            |             |   |             |   |             |            |   |   |            |    

|    |                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes
 $384,000 compensation charge for performance bonuses and additional amortization
     expense $493,000 due to a change in the Asset Intelligence purchase price
     allocation.

79

---



|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements with Accountants on Accounting and
 Financial Disclosure

None.

|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures

During the
fourth quarter of our fiscal year ended December 31, 2010, our management,
including the principal executive officer and principal financial officer,
evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) related to the recording, processing,
summarization, and reporting of information in our reports that we file with
the SEC. These disclosure controls and procedures have been designed to ensure
that material information relating to us is made known to our management,
including these officers, by other of our employees, and that this information
is recorded, processed, summarized, evaluated and reported, as applicable,
within the time periods specified in the SECs rules and forms. Due to the
inherent limitations of control systems, not all misstatements may be detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.

I.D. Systems,
Inc. acquired Asset Intelligence, LLC, during January 2010. Management has
excluded Asset Intelligence, LLC from its assessment of internal control over
financial reporting as of December 31, 2010 due to the acquisition occurring
during the first quarter of 2010. Total assets and total revenues of Asset Intelligence,
LLC represent approximately 41% (approximately $25,150,000) and 59%
(approximately $15,155,000), respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2010.

Based on their
evaluation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) are effective as of December 31, 2010 to
reasonably ensure that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms and that information required to be disclosed by us in the reports we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.

Managements Report on Internal Control Over Financial Reporting

Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and 15d-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under this framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2010.

|         |                  
|-------- | -----------------
|Item 9B. | Other Information

None.

80

---



PART III.

Item 10.
Directors, Executive Officers and Corporate Governance

The Company
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2011 annual meeting of stockholders that is responsive
to the information required with respect to this Item 10; provided, however,
that such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
 information that is responsive to the information required with respect to
 this Item 10 is provided by means of an amendment to this Annual Report on
 Form 10-K filed with the SEC prior to the filing of such definitive proxy
 statement; or                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                         
| |  | if such
 proxy statement is not mailed to stockholders and filed with the SEC within
 120 days after the end of the Companys most recently completed fiscal year,
 in which case the Company will provide such information by means of an
 amendment to this Annual Report on Form 10-K filed with the SEC within such
 120-day period.

Item 11.
Executive Compensation

The Company
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2011 annual meeting of stockholders that is responsive
to the information required with respect to this Item 11; provided, however,
that such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
 information that is responsive to the information required with respect to
 this Item 11 is provided by means of an amendment to this Annual Report on
 Form 10-K filed with the SEC prior to the filing of such definitive proxy
 statement; or                                                    
| |   |                                                                                                                                                                                                                                                                                                             
| |  | if such
 proxy statement is not mailed to stockholders and filed with the SEC within
 120 days after the end of the Companys most recently completed fiscal year,
 in which case the Company will provide such information by means of an
 amendment to this Annual Report on Form 10-K filed with the SEC.

Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

The Company
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2011 annual meeting of stockholders that is responsive
to the information required with respect to this Item 12; provided, however,
that such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
 information that is responsive to the information required with respect to
 this Item 12 is provided by means of an amendment to this Annual Report on
 Form 10-K filed with the SEC prior to the filing of such definitive proxy
 statement; or                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                         
| |  | if such
 proxy statement is not mailed to stockholders and filed with the SEC within
 120 days after the end of the Companys most recently completed fiscal year,
 in which case the Company will provide such information by means of an
 amendment to this Annual Report on Form 10-K filed with the SEC within such
 120-day period.

81

---



Item 13. Certain
Relationships and Related Transactions, and Director Independence

The Company
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2011annual meeting of stockholders that is responsive
to the information required with respect to this Item 13; provided, however,
that such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
 information that is responsive to the information required with respect to
 this Item 13 is provided by means of an amendment to this Annual Report on
 Form 10-K filed with the SEC prior to the filing of such definitive proxy
 statement; or                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                         
| |  | if such
 proxy statement is not mailed to stockholders and filed with the SEC within
 120 days after the end of the Companys most recently completed fiscal year,
 in which case the Company will provide such information by means of an
 amendment to this Annual Report on Form 10-K filed with the SEC within such
 120-day period.

Item 14.
Principal Accounting Fees and Services

The Company
incorporates by reference herein information to be set forth in its definitive
proxy statement for its 2011 annual meeting of stockholders that is responsive
to the information required with respect to this Item 14; provided, however,
that such information shall not be incorporated herein:

| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if the
 information that is responsive to the information required with respect to
 this Item 14 is provided by means of an amendment to this Annual Report on
 Form 10-K filed with the SEC prior to the filing of such definitive proxy
 statement; or                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                         
| |  | if such
 proxy statement is not mailed to stockholders and filed with the SEC within
 120 days after the end of the Companys most recently completed fiscal year,
 in which case the Company will provide such information by means of an
 amendment to this Annual Report on Form 10-K filed with the SEC within such
 120-day period.

82

---



PART IV.

Item 15.
Exhibits, Financial Statement Schedules

(a) List of
Financial Statements, Financial Statement Schedules, and Exhibits.

| |                                                                                                                                                                                                                           |                                                                                                                              
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------
| | (1)                                                                                                                                                                                                                       | Financial
 Statements. The following financial statements of
 I.D. Systems, Inc. are included in Item 8 of Part II of this   
| | Annual
 Report on Form 10-K:                                                                                                                                                                                             
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Report of
 Independent Registered Public Accounting Firm                                                                     
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Consolidated
 Balance Sheets as of December 31, 2009 and 2010                                                                
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Consolidated
 Statements of Operations for the Years Ended December 31, 2008, 2009 and 2010                                  
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Consolidated
 Statements of Changes in Stockholders Equity for the Years Ended December
 31, 2008, 2009 and 2010            
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Consolidated
 Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010                                  
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Notes to the
 Consolidated Financial Statements                                                                              
| |                                                                                                                                                                                                                           |                                                                                                                              
| | (2)                                                                                                                                                                                                                       | Financial
 Statement Schedules.                                                                                              
| |                                                                                                                                                                                                                           |                                                                                                                              
| |                                                                                                                                                                                                                           | Schedule II
 - Valuation and Qualifying Accounts                                                                             
| |                                                                                                                                                                                                                           |                                                                                                                              
| | All
 other financial statement schedules are omitted from this Annual Report on
 Form 10-K, as they are not required or applicable or the required information
 is included in the financial statements or notes thereto.
| |                                                                                                                                                                                                                           |                                                                                                                              
| | (3)                                                                                                                                                                                                                       | Exhibits.
 The following exhibits are filed with this Annual Report on Form 10-K or are
 incorporated herein by reference, as
| | indicated.                                                                                                                                                                                                               

| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2.1   |  | Membership
 Interest Purchase Agreement, dated as of January 7, 2010, by and among I.D.
 Systems, Inc., General Electric Capital Corporation and GE Asset
 Intelligence, LLC (incorporated by reference to Exhibit 2.1 to the Current
 Report on Form 8-K of I.D. Systems, Inc. (File No. 001-15087) filed with the
 SEC on January 13, 2010).
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 3.1.1 |  | Restated
 Certificate of Incorporation of I.D. Systems, Inc., as amended (incorporated
 by reference to Exhibit 3.1 to Amendment No. 3 to the Registration Statement
 on Form SB-2 of I.D. Systems, Inc. (File No. 333-76947) filed with the SEC on
 June 28, 1999).                                                                          
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 3.1.2 |  | Certificate of Designation for the
 Series A Junior Participating Preferred Stock (incorporated by reference to
 Exhibit 3.3 to the Current Report on Form 8-K of I.D. Systems, Inc. (File No.
 001-15087) filed with the SEC on July 8, 2009).                                                                                               
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 3.2   |  | Restated
 By-Laws of I.D. Systems, Inc. (incorporated by reference to Exhibit 3.2 to
 Amendment No. 3 to the Registration Statement on Form SB-2 of I.D. Systems,
 Inc. (File No. 333-76947) filed with the SEC on June 28, 1999).                                                                                                            
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 4.1   |  | Specimen
 Certificate of I.D. Systems, Inc.s Common Stock (incorporated by reference
 to Exhibit 4.1 to Amendment No. 3 to the Registration Statement on Form SB-2
 of I.D. Systems, Inc. (File No. 333-76947) filed with the SEC on June 28,
 1999).                                                                                        
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 4.2   |  | Rights
 Agreement, dated as of July 1, 2009, between I.D. Systems, Inc. and American
 Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by
 reference to Exhibit 4.2 to the Current Report on Form 8-K of I.D. Systems,
 Inc. (File No. 001-15087) filed with the SEC on July 8, 2009).                                      
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 10.1  |  | 1995
 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.5 to
 the Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
 333-76947) filed with the SEC on April 23, 1999).*                                                                                                                              
| |  |       |  |                                                                                                                                                                                                                                                                                                                                               
| |  | 10.2  |  | 1999 Stock
 Option Plan (incorporated by reference to Exhibit 10.6 to the Registration
 Statement on Form SB-2 of I.D. Systems, Inc. (File No. 333-76947) filed with
 the SEC on April 23, 1999).*                                                                                                                                            

83

---



| |       |  |                                                                                                                                                                                                                                                                                                                             
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.3  |  | 1999
 Director Option Plan (incorporated by reference to Exhibit 10.10 to Amendment
 No. 2 to the Registration Statement on Form SB-2 of I.D. Systems, Inc. (File
 No. 333-76947) filed with the SEC on June 8, 1999).*                                                                                                     
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.4  |  | 2007 Equity
 Compensation Plan (incorporated by reference to Exhibit 4.4 to Amendment No.
 2 to the Registration Statement on Form S-8 of I.D. Systems, Inc. (File No.
 333-144709) filed with the SEC on July 19, 2007).*                                                                                                  
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.5  |  | 2009
 Non-Employee Director Equity Compensation Plan (incorporated by reference to
 Exhibit 10.5 to the Quarterly Report on Form 10-Q of I.D. Systems, Inc. (File
 No. 001-15087) filed with the SEC on November 6, 2009).*                                                                                                 
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.6  |  | Office
 Lease, dated November 4, 1999, between I.D. Systems, Inc. and Venture
 Hackensack Holding, Inc. (incorporated by reference to Exhibit 10.9 to the
 Annual Report on Form 10-KSB of I.D. Systems, Inc. for the fiscal year ended
 December 31, 1999 filed with the SEC on March 29, 2000).                           
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.7  |  | Severance
 Agreement, dated September 11, 2009, by and between I.D. Systems, Inc. and
 Jeffrey Jagid (incorporated by reference to Exhibit 10.1 to the Quarterly
 Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
 September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
 2009).*
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.8  |  | Severance
 Agreement, dated September 11, 2009, by and between the Company and Ned
 Mavrommatis (incorporated by reference to Exhibit 10.2 to the Quarterly
 Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
 September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
 2009).*     
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.9  |  | Severance
 Agreement, dated September 11, 2009, by and between the Company and Kenneth
 Ehrman (incorporated by reference to Exhibit 10.3 to the Quarterly Report on
 Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended September 30,
 2009 (File No. 001-15087) filed with the SEC on November 6, 2009).*       
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.10 |  | Severance
 Agreement, dated September 11, 2009, by and between the Company and Michael
 Ehrman (incorporated by reference to Exhibit 10.4 to the Quarterly Report on
 Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended September 30,
 2009 (File No. 001-15087) filed with the SEC on November 6, 2009).*       
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.11 |  | Office Lease
 Agreement, dated as of May 10, 2010, by and between IPC New York Properties,
 LLC, as Landlord, and I.D. Systems, Inc., as Tenant (incorporated by
 reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of I.D.
 Systems, Inc. (File No. 001-15087) filed with the SEC on May 17, 2010).           
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 10.12 |  | Severance
 Agreement, dated December 14, 2010, by and between the Company and Darryl
 Miller (filed herewith).*                                                                                                                                                                                                             
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 21.1  |  | List of
 Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                     
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 23.1  |  | Consent of
 EisnerAmper LLP (filed herewith).                                                                                                                                                                                                                                                                               
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 31.1  |  | Certification
 of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002 (filed herewith).                                                                                                                                                                                                      
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 31.2  |  | Certification
 of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002 (filed herewith).                                                                                                                                                                                                      
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 32.1  |  | Certification
 of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                       
| |       |  |                                                                                                                                                                                                                                                                                                                             
| | 32.2  |  | Certification
 of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                       

* Management contract or
compensatory plan or arrangement.

(b) Exhibits.
The exhibits required by Item 601 of Regulation S-K are filed herewith or
incorporated herein by reference. Please see the Index to Exhibits to this
Annual Report on Form 10-K, which is incorporated into this Item 15(b) by
reference.

84

---



SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date: March
30, 2011

| |                     |                                              
| | ------------------- | ---------------------------------------------
| | I.D.
 SYSTEMS, INC.
| |                     |                                              
| | By:                 | /s/ Jeffrey
 M. Jagid                        
| |                     |                                              
| |                     | Jeffrey M.
 Jagid                            
| |                     | Chief
 Executive Officer                     
| |                     | (Principal
 Executive Officer)               
| |                     |                                              
| | By:                 | /s/ Ned
 Mavrommatis                         
| |                     |                                              
| |                     | Ned
 Mavrommatis                             
| |                     | Chief
 Financial Officer                     
| |                     | (Principal
 Financial and Accounting Officer)

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report is signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                          |  |                                               |  |                
|------------------------- |  | --------------------------------------------- |  | ---------------
|Signature                 |  | Title                                         |  | Date           
|                          |  |                                               |  |                
|/s/ Jeffrey
 M. Jagid     |  | Chief
 Executive Officer and Director         |  | March 30,
 2011
|                          |  | (Principal
 Executive Officer)                |  |                
|Jeffrey M.
 Jagid         |  |                                               |  |                
|                          |  |                                               |  |                
|/s/ Kenneth
 S. Ehrman    |  | President
 and Director                       |  | March 30,
 2011
|                          |  |                                               |  |                
|Kenneth S.
 Ehrman        |  |                                               |  |                
|                          |  |                                               |  |                
|/s/ Ned
 Mavrommatis      |  | Chief
 Financial Officer                      |  | March 30,
 2011
|                          |  | (Principal
 Financial and Accounting Officer) |  |                
|Ned
 Mavrommatis          |  |                                               |  |                
|                          |  |                                               |  |                
|/s/ Lawrence
 S. Burstein |  | Director                                      |  | March 30,
 2011
|                          |  |                                               |  |                
|Lawrence
 Burstein        |  |                                               |  |                
|                          |  |                                               |  |                
|/s/ Harold
 D. Copperman  |  | Director                                      |  | March 30,
 2011
|                          |  |                                               |  |                
|Harold D.
 Copperman      |  |                                               |  |                
|                          |  |                                               |  |                
|/s/ Michael
 P. Monaco    |  | Director                                      |  | March 30,
 2011
|                          |  |                                               |  |                
|Michael
 Monaco           |  |                                               |  |                
|                          |  |                                               |  |                

85

---



I.D. SYSTEMS, INC. 
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                              |  |                               |     |                                                 |   |                                  |   |                            |   |  |   |     | 
|----------------------------- |  | ----------------------------- | --- | ----------------------------------------------- | - | -------------------------------- | - | -------------------------- | - |  | - | --- | 
|Description                   |  | Balance at
 Beginning
 Period |     | Charged to
 (Write-off)
 to Costs and
 Expenses |   | Other Additions
 Or (Deductions) |   | Balance at
 End of
 Period |  
|                              |  |                               |     |                                                 |   |                                  |   |                            |  
|Inventory
 reserve            |  |                               |     |                                                 |   |                                  |   |                            |   |  |   |     | 
|                              |  |                               |     |                                                 |   |                                  |   |                            |   |  |   |     | 
|Year ended December 31,
 2010 |  | $                             | 930 |                                                 | $ | (58                              | ) |                            |  |  | $ | 872 | 
|                              |  |                               |     |                                                 |   |                                  |   |                            |   |  |   |     | 
|Year ended December 31,
 2009 |  | $                             | 748 |                                                 | $ | 182                              |   |                            |  |  | $ | 930 | 
|                              |  |                               |     |                                                 |   |                                  |   |                            |   |  |   |     | 
|Year ended December 31,
 2008 |  | $                             | 642 |                                                 | $ | 126                              |   |                            |  |  | $ | 748 | 

|                                 |  |                               |     |                                                 |   |                                  |   |                          |     |   |   |     | 
|-------------------------------- |  | ----------------------------- | --- | ----------------------------------------------- | - | -------------------------------- | - | ------------------------ | --- | - | - | --- | 
|Description                      |  | Balance at
 Beginning
 Period |     | Charged to
 (Write-off)
 to Costs and
 Expenses |   | Other Additions
 Or (Deductions) |   | Balance atEnd of
 Period |    
|                                 |  |                               |     |                                                 |   |                                  |   |                          |    
|Allowance
 for doubtful accounts |  |                               |     |                                                 |   |                                  |   |                          |     |   |   |     | 
|                                 |  |                               |     |                                                 |   |                                  |   |                          |     |   |   |     | 
|Year ended December 31,
 2010    |  | $                             | 106 |                                                 | $ | 65                               |   |                          | (10 | ) | $ | 161 | 
|                                 |  |                               |     |                                                 |   |                                  |   |                          |     |   |   |     | 
|Year ended December 31,
 2009    |  | $                             | 239 |                                                 | $ | (133                             | ) |                          |    |   | $ | 106 | 
|                                 |  |                               |     |                                                 |   |                                  |   |                          |     |   |   |     | 
|Year ended December 31,
 2008    |  | $                             | 239 |                                                 | $ |                                 |   |                          |    |   | $ | 239 | 

---



INDEX TO EXHIBITS

|      |                                                                                                                                                                                                                                                                                                                                               
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1   | Membership
 Interest Purchase Agreement, dated as of January 7, 2010, by and among I.D.
 Systems, Inc., General Electric Capital Corporation and GE Asset
 Intelligence, LLC (incorporated by reference to Exhibit 2.1 to the Current
 Report on Form 8-K of I.D. Systems, Inc. (File No. 001-15087) filed with the
 SEC on January 13, 2010).
|      |                                                                                                                                                                                                                                                                                                                                               
|3.1.1 | Restated
 Certificate of Incorporation of I.D. Systems, Inc., as amended (incorporated
 by reference to Exhibit 3.1 to Amendment No. 3 to the Registration Statement
 on Form SB-2 of I.D. Systems, Inc. (File No. 333-76947) filed with the SEC on
 June 28, 1999).                                                                          
|      |                                                                                                                                                                                                                                                                                                                                               
|3.1.2 | Certificate
 of Designation for the Series A Junior Participating Preferred Stock
 (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K
 of I.D. Systems, Inc. (File No. 001-15087) filed with the SEC on July 8,
 2009).                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                               
|3.2   | Restated
 By-Laws of I.D. Systems, Inc. (incorporated by reference to Exhibit 3.2 to
 Amendment No. 3 to the Registration Statement on Form SB-2 of I.D. Systems,
 Inc. (File No. 333-76947) filed with the SEC on June 28, 1999).                                                                                                            
|      |                                                                                                                                                                                                                                                                                                                                               
|4.1   | Specimen
 Certificate of I.D. Systems, Inc.s Common Stock (incorporated by reference
 to Exhibit 4.1 to Amendment No. 3 to the Registration Statement on Form SB-2
 of I.D. Systems, Inc. (File No. 333-76947) filed with the SEC on June 28,
 1999).                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                               
|4.2   | Rights
 Agreement, dated as of July 1, 2009, between I.D. Systems, Inc. and American
 Stock Transfer & Trust Company, LLC, as Rights Agent (incorporated by
 reference to Exhibit 4.2 to the Current Report on Form 8-K of I.D. Systems,
 Inc. (File No. 001-15087) filed with the SEC on July 8, 2009).                                      
|      |                                                                                                                                                                                                                                                                                                                                               
|10.1  | 1995
 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.5 to
 the Registration Statement on Form SB-2 of I.D. Systems, Inc. (File No.
 333-76947) filed with the SEC on April 23, 1999).*                                                                                                                              
|      |                                                                                                                                                                                                                                                                                                                                               
|10.2  | 1999 Stock
 Option Plan (incorporated by reference to Exhibit 10.6 to the Registration
 Statement on Form SB-2 of I.D. Systems, Inc. (File No. 333-76947) filed with
 the SEC on April 23, 1999).*                                                                                                                                            
|      |                                                                                                                                                                                                                                                                                                                                               
|10.3  | 1999
 Director Option Plan (incorporated by reference to Exhibit 10.10 to Amendment
 No. 2 to the Registration Statement on Form SB-2 of I.D. Systems, Inc. (File
 No. 333-76947) filed with the SEC on June 8, 1999).*                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                               
|10.4  | 2007 Equity
 Compensation Plan (incorporated by reference to Exhibit 4.4 to Amendment No.
 2 to the Registration Statement on Form S-8 of I.D. Systems, Inc. (File No.
 333-144709) filed with the SEC on July 19, 2007).*                                                                                                                    
|      |                                                                                                                                                                                                                                                                                                                                               
|10.5  | 2009
 Non-Employee Director Equity Compensation Plan (incorporated by reference to
 Exhibit 10.5 to the Quarterly Report on Form 10-Q of I.D. Systems, Inc. (File
 No. 001-15087) filed with the SEC on November 6, 2009).*                                                                                                                   
|      |                                                                                                                                                                                                                                                                                                                                               
|10.6  | Office
 Lease, dated November 4, 1999, between I.D. Systems, Inc. and Venture
 Hackensack Holding, Inc. (incorporated by reference to Exhibit 10.9 to the
 Annual Report on Form 10-KSB of I.D. Systems, Inc. for the fiscal year ended
 December 31, 1999 filed with the SEC on March 29, 2000).                                             
|      |                                                                                                                                                                                                                                                                                                                                               
|10.7  | Severance
 Agreement, dated September 11, 2009, by and between I.D. Systems, Inc. and
 Jeffrey Jagid (incorporated by reference to Exhibit 10.1 to the Quarterly
 Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
 September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
 2009).*                  
|      |                                                                                                                                                                                                                                                                                                                                               
|10.8  | Severance
 Agreement, dated September 11, 2009, by and between the Company and Ned
 Mavrommatis (incorporated by reference to Exhibit 10.2 to the Quarterly
 Report on Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended
 September 30, 2009 (File No. 001-15087) filed with the SEC on November 6,
 2009).*                       
|      |                                                                                                                                                                                                                                                                                                                                               
|10.9  | Severance
 Agreement, dated September 11, 2009, by and between the Company and Kenneth
 Ehrman (incorporated by reference to Exhibit 10.3 to the Quarterly Report on
 Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended September 30,
 2009 (File No. 001-15087) filed with the SEC on November 6, 2009).*                         
|      |                                                                                                                                                                                                                                                                                                                                               
|10.10 | Severance
 Agreement, dated September 11, 2009, by and between the Company and Michael
 Ehrman (incorporated by reference to Exhibit 10.4 to the Quarterly Report on
 Form 10-Q of I.D. Systems, Inc. for the fiscal quarter ended September 30,
 2009 (File No. 001-15087) filed with the SEC on November 6, 2009).*                         
|      |                                                                                                                                                                                                                                                                                                                                               
|10.11 | Office Lease
 Agreement, dated as of May 10, 2010, by and between IPC New York Properties,
 LLC, as Landlord, and I.D. Systems, Inc., as Tenant (incorporated by
 reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of I.D.
 Systems, Inc. (File No. 001-15087) filed with the SEC on May 17, 2010).                             
|      |                                                                                                                                                                                                                                                                                                                                               
|10.12 | Severance
 Agreement, dated December 14, 2010, by and between the Company and Darryl
 Miller (filed herewith).*                                                                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                                                                                                               
|21.1  | List of
 Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                                                       
|      |                                                                                                                                                                                                                                                                                                                                               
|23.1  | Consent of
 EisnerAmper LLP (filed herewith).                                                                                                                                                                                                                                                                                                 
|      |                                                                                                                                                                                                                                                                                                                                               
|31.1  | Certification
 of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002 (filed herewith).                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                               
|31.2  | Certification
 of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 of 2002 (filed herewith).                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                                               
|32.1  | Certification
 of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                               
|32.2  | Certification
 of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                         

---